`REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS


To MAXXAM Inc.:

We have audited the accompanying consolidated balance sheets of MAXXAM Inc. (a
Delaware corporation) and subsidiaries as of December 31, 2001 and 2000, and the
related consolidated statements of operations, stockholders' equity (deficit)
and cash flows for each of the three years in the period ended December 31,
2001. These consolidated financial statements and the schedule referred to below
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements and schedule based
on our audits.

We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of MAXXAM Inc. and
subsidiaries as of December 31, 2001 and 2000, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2001, in conformity with accounting principles generally accepted
in the United States.

As discussed in Note 1 to the consolidated financial statements, on February 12,
2002, Kaiser Aluminum Corporation (Kaiser), a majority owned consolidated
subsidiary of MAXXAM Inc., and certain of its subsidiaries filed for
reorganization under Chapter 11 of the United States Bankruptcy Code. As
a result, Kaiser's financial results will be deconsolidated beginning February
12, 2002 and MAXXAM Inc. will begin reporting its investment in Kaiser using the
cost method. Kaiser and subsidiaries represent 69 percent and 73 percent of
MAXXAM Inc.'s total consolidated assets at December 31, 2001 and 2000, and 86
percent, 87 percent and 87 percent of its total consolidated revenues for the
years ended December 31, 2001, 2000 and 1999, respectively. See Note 1 for a
discussion of the impact on MAXXAM Inc.'s consolidated financial statements.

Our audits were made for the purpose of forming an opinion on the basic
consolidated financial statements taken as a whole. The schedule listed in Item
14(a)(2) of this Form 10-K is presented for purposes of complying with the
Securities and Exchange Commission's rules and is not part of the basic
consolidated financial statements. This schedule has been subjected to the
auditing procedures applied in the audits of the basic consolidated financial
statements and, in our opinion, fairly states in all material respects the
financial data required to be set forth therein in relation to the basic
consolidated financial statements taken as a whole.

                                    ARTHUR ANDERSEN LLP

Houston, Texas
April 12, 2002


                          MAXXAM INC. AND SUBSIDIARIES

                           CONSOLIDATED BALANCE SHEET
               (IN MILLIONS OF DOLLARS, EXCEPT SHARE INFORMATION)


                                                                                                 DECEMBER 31,
                                                                                            -----------------------
                                                                                               2001         2000
                                                                                            -----------  ----------
ASSETS
Current assets:
   Cash and cash equivalents............................................................... $    272.2   $   353.2
   Marketable securities...................................................................      152.8        44.6
   Receivables:
      Trade, net of allowance for doubtful accounts of $10.0 and $6.4, respectively........      140.5       202.3
      Other................................................................................       91.6       251.6
   Inventories.............................................................................      364.7       451.3
   Prepaid expenses and other current assets...............................................      134.2       203.1
                                                                                            -----------  ----------
        Total current assets...............................................................    1,156.0     1,506.1
Property, plant and equipment, net of accumulated depreciation of $1,094.7 and
   $1,033.0, respectively..................................................................    1,499.5     1,331.3
Timber and timberlands, net of accumulated depletion of $193.6 and $183.8, respectively....      235.1       244.3
Investments in and advances to unconsolidated affiliates...................................       70.9        85.5
Deferred income taxes......................................................................      109.6       553.1
Restricted cash, marketable securities and other investments...............................       98.5       106.3
Long-term receivables and other assets.....................................................      765.7       677.4
                                                                                            -----------  ----------
                                                                                            $  3,935.3   $ 4,504.0
                                                                                            ===========  ==========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
   Accounts payable........................................................................ $    180.4   $   248.7
   Accrued interest........................................................................       66.1        70.1
   Accrued compensation and related benefits...............................................      168.3       180.8
   Other accrued liabilities...............................................................      248.6       313.5
   Payable to affiliates...................................................................       52.9        78.3
   Short-term borrowings and current maturities of long-term debt, excluding $2.3 and
      $2.2, respectively, of repurchased Timber Notes held in the SAR Account..............      217.2        98.4
                                                                                            -----------  ----------
        Total current liabilities..........................................................      933.5       989.8
Long-term debt, less current maturities and excluding $55.4 and $57.7, respectively, of
   repurchased Timber Notes held in the SAR Account........................................    1,706.8     1,885.0
Accrued postretirement medical benefits....................................................      652.4       667.4
Other noncurrent liabilities...............................................................      999.7       779.9
                                                                                            -----------  ----------
        Total liabilities..................................................................    4,292.4     4,322.1
                                                                                            -----------  ----------
Commitments and contingencies (see Note 16)
Minority interests.........................................................................      118.5       132.8
Stockholders' equity (deficit):
   Preferred stock, $0.50 par value; 12,500,000 shares authorized; Class A $0.05
      Non-Cumulative Participating Convertible Preferred Stock; 669,235 and
      669,355
      shares issued, respectively..........................................................        0.3         0.3
   Common stock, $0.50 par value; 28,000,000 shares authorized;
      10,063,359 shares issued.............................................................        5.0         5.0
   Additional capital......................................................................      225.3       225.3
   Accumulated deficit.....................................................................     (524.2)      (68.2)
   Accumulated other comprehensive loss....................................................      (66.3)       (0.5)
    Treasury stock, at cost (shares held:  preferred - 845; common - 3,535,688
      and 3,315,008, respectively).........................................................     (115.7)     (112.8)
                                                                                            -----------  ----------
        Total stockholders' equity (deficit)...............................................     (475.6)       49.1
                                                                                            -----------  ----------
                                                                                            $  3,935.3   $ 4,504.0
                                                                                            ===========  ==========
                          MAXXAM INC. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENT OF OPERATIONS
             (IN MILLIONS OF DOLLARS, EXCEPT PER SHARE INFORMATION)


                                                                                    YEARS ENDED DECEMBER 31,
                                                                             --------------------------------------
                                                                                2001         2000          1999
                                                                             -----------  -----------  ------------
Net sales:
   Aluminum................................................................  $  1,732.7   $  2,169.8   $   2,083.6
   Forest products.........................................................       185.3        200.1         187.8
   Real estate.............................................................        69.1         47.2          52.0
   Racing..................................................................        31.1         30.9          27.3
                                                                             -----------  -----------  ------------
                                                                                2,018.2      2,448.0       2,350.7
                                                                             -----------  -----------  ------------
Cost and expenses:
   Cost of sales and operations:
      Aluminum.............................................................     1,457.1      1,798.3       1,898.5
      Forest products......................................................       170.3        157.4         159.5
      Real estate..........................................................        28.4         24.1          29.7
      Racing...............................................................        20.4         19.5          15.9
   Selling, general and administrative expenses............................       163.6        168.7         170.4
   Impairment of assets....................................................        19.9         51.2          19.8
   Depreciation, depletion and amortization................................       113.1         98.2         108.4
                                                                             -----------  -----------  ------------
                                                                                1,972.8      2,317.4       2,402.2
                                                                             -----------  -----------  ------------

Operating income (loss)....................................................        45.4        130.6         (51.5)

Other income (expense):
   Gains on sale of an interest in QAL.....................................       163.6            -             -
   Gains on sales of timberlands...........................................        16.7          60.0        239.8
   Gain on involuntary conversion at Gramercy facility.....................           -            -          85.0
   Investment, interest and other income (expense), net....................         1.0         62.7          18.3
   Interest expense........................................................      (182.9)      (185.9)       (190.1)
   Amortization of deferred financing costs................................        (7.8)        (7.1)         (7.0)
                                                                             -----------  -----------  ------------
Income before income taxes, minority interests and extraordinary items.....        36.0         60.3          94.5
Provision for income taxes.................................................      (533.7)       (27.1)        (43.7)
Minority interests.........................................................        38.1         (3.2)         22.8
                                                                             -----------  -----------  ------------
Income (loss) before extraordinary items...................................      (459.6)        30.0          73.6
Extraordinary items:
   Gains on repurchases of debt, net of income tax provision of $2.0
      and $2.4, respectively...............................................         3.6          3.9             -
                                                                             -----------  -----------  ------------
Net income (loss)..........................................................  $   (456.0)  $     33.9   $      73.6
                                                                             ===========  ===========  ============

Basic earnings (loss) per common share:
   Income (loss) before extraordinary items................................  $   (69.83)  $     3.95   $      9.58
   Extraordinary items.....................................................        0.55         0.52             -
                                                                             -----------  -----------  ------------
   Net income (loss).......................................................  $   (69.28)  $     4.47   $      9.58
                                                                             ===========  ===========  ============

Diluted earnings (loss) per common and common equivalent share:
   Income (loss) before extraordinary items................................  $   (69.83)  $     3.95   $      9.49
   Extraordinary items.....................................................        0.55         0.52             -
                                                                             -----------  -----------  ------------
   Net income (loss).......................................................  $   (69.28)  $     4.47   $      9.49
                                                                             ===========  ===========  ============



   The accompanying notes are an integral part of these financial statements.



                          MAXXAM INC. AND SUBSIDIARIES

            CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
                   (IN MILLIONS, EXCEPT PER SHARE INFORMATION)


                                                                                     ACCUMU-
                                                                                     LATED
                                              COMMON STOCK                           OTHER
                                              ------------                           COMPRE-                       COMPRE-
                                 PREFERRED                        ADDI-    ACCUMU-   HENSIVE                       HENSIVE
                                   STOCK                         TIONAL     LATED    INCOME   TREASURY             INCOME
                                 ($.50 PAR)  Shares  ($.50 Par)  CAPITAL   DEFICIT   (LOSS)    STOCK     TOTAL     (LOSS)
                                 ---------   ------  ----------  -------  --------- -------- --------- --------- ---------
Balance, December 31, 1998...... $    0.3       7.0  $    5.0    $ 222.8   $ (175.7) $     -  $ (109.2) $  (56.8)
   Net income...................        -         -         -          -       73.6        -         -      73.6 $    73.6
   Minimum pension liability
       adjustment...............        -         -         -          -          -     (0.7)        -      (0.7)     (0.7)
                                                                                                                 ---------
   Comprehensive income.........                                                                                 $   72.9
                                                                                                                 =========
   Treasury stock issuances.....        -         -         -        2.5          -        -       9.2      11.7
                                 ---------   ------- ----------  -------  --------- -------- --------- ---------

Balance, December 31, 1999......      0.3       7.0       5.0      225.3     (102.1)    (0.7)   (100.0)     27.8
   Net income...................        -         -         -          -       33.9        -         -      33.9 $    33.9
   Minimum pension liability
       adjustment...............        -         -         -          -          -     (0.4)        -      (0.4)     (0.4)
     Change in value of
     available-for-sale
     investments................        -         -         -          -          -      0.6         -       0.6       0.6
                                                                                                                 ---------
   Comprehensive income.........                                                                                 $    34.1
                                                                                                                 =========
   Treasury stock purchases.....        -         -         -          -          -        -     (12.8)    (12.8)
                                 ---------   ------- ----------  -------  --------- -------- --------- ---------

Balance, December 31, 2000......      0.3       7.0       5.0      225.3      (68.2)    (0.5)   (112.8)     49.1
   Net loss.....................        -         -         -          -     (456.0)       -         -    (456.0)$  (456.0)
   Minimum pension liability
     adjustment.................        -         -         -          -          -    (65.1)        -     (65.1)    (65.1)

   Cumulative effect of
     accounting change..........        -         -         -          -          -      1.8         -       1.8       1.8

   Unrealized net gain on
     derivative instruments
     arising during the period..        -         -         -          -          -     33.1         -      33.1      33.1
   Reclassification
     adjustment for realized
     net gain on derivative
     instruments included
     in net income..............        -         -         -          -          -    (10.9)        -     (10.9)    (10.9)
   Adjustment of valuation
     allowances for net deferred
     income tax assets provided
     in respect of items
     reflected in other
     comprehensive income.......        -         -         -          -          -    (25.0)        -     (25.0)    (25.0)
   Change in value of
     available-for-sale
     investments................        -         -         -          -          -      0.3         -       0.3       0.3
                                                                                                                 ---------
   Comprehensive loss...........                                                                                 $  (521.8)
                                                                                                                 =========
   Treasury stock purchases.....        -         -         -          -          -        -      (2.9)     (2.9)
                                 ---------   ------- ----------  -------  --------- -------- --------- ---------
Balance, December 31, 2001...... $    0.3       7.0  $    5.0    $ 225.3   $ (524.2) $ (66.3) $ (115.7) $ (475.6)
                                 =========   ======= ==========  =======  ========= ======== ========= =========

                          MAXXAM INC. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENT OF CASH FLOWS
                            (IN MILLIONS OF DOLLARS)


                                                                                        YEARS ENDED DECEMBER 31,
                                                                                      -----------------------------
                                                                                        2001       2000      1999
                                                                                      ---------  --------  --------
CASH FLOWS FROM OPERATING ACTIVITIES:
   Net income (loss)................................................................  $ (456.0)  $  33.9   $  73.6
   Adjustments to reconcile net income (loss) to net cash provided
      by (used for) operating activities:
      Depreciation, depletion and amortization......................................     113.1      98.2     108.4
      Non-cash impairments and restructuring charges................................      49.9      63.2      19.8
      Extraordinary gains on repurchases of debt, net...............................      (3.6)     (3.9)        -
      Stock-based compensation expense..............................................         -         -      11.7
      Gain on sale of QAL interest..................................................    (163.6)        -         -
      Gains on sales of timberlands.................................................     (16.7)    (60.0)   (239.8)
      Gain on involuntary conversion at Gramercy facility...........................         -         -     (85.0)
      Net gains on marketable securities............................................      (8.0)    (27.9)    (18.2)
      Net gains on other asset dispositions.........................................      (9.6)    (51.9)    (45.3)
      Minority interests............................................................     (38.1)      3.2     (22.8)
      Amortization of deferred financing costs and discounts on long-term debt......       7.8       7.1       7.3
      Equity in earnings (loss) of unconsolidated affiliates, net of
        dividends received                                                                 0.8      18.7      (4.6)
      Other.........................................................................       7.0         -         -
      Increase (decrease) in cash resulting from changes in:
        Receivables.................................................................     228.1    (167.5)     24.4
        Inventories.................................................................      69.8     113.7      (4.7)
        Prepaid expenses and other assets...........................................      21.1      18.2     (60.4)
        Accounts payable............................................................     (36.2)    (29.1)     59.9
        Accrued and deferred income taxes...........................................     505.2       5.3      19.7
        Payable to affiliates and other accrued liabilities.........................     (49.0)     66.9      16.8
        Accrued interest............................................................      (4.1)     (2.3)        -
        Long-term assets and long-term liabilities..................................     (21.6)    (66.0)     20.7
      Other.........................................................................      12.3      19.0      (6.6)
                                                                                      ---------  --------  --------
        Net cash provided by (used for) operating activities........................     208.6      38.8    (125.1)
                                                                                      ---------  --------  --------
CASH FLOWS FROM INVESTING ACTIVITIES:
   Net proceeds from dispositions of property and investments.......................     191.6     252.2     375.1
   Net sales (purchases) of marketable securities and other investments.............     (99.4)     42.0      (4.8)
   Capital expenditures.............................................................    (333.3)   (288.3)    (95.8)
   Restricted cash withdrawals used to acquire timberlands..........................         -       0.8      12.9
   Other............................................................................       2.4       0.1      (3.3)
                                                                                      ---------  --------  --------
        Net cash provided by (used for) investing activities........................    (238.7)      6.8     284.1
                                                                                      ---------  --------  --------
CASH FLOWS FROM FINANCING ACTIVITIES:
   Proceeds from issuances of long-term debt........................................     136.2      32.4       2.9
   Redemptions, repurchases of and principal payments on long-term debt.............    (131.1)    (44.6)    (19.6)
   Borrowings (repayments) under revolving and short-term credit facilities.........     (49.5)     62.2      10.4
   Incurrence of deferred financing costs...........................................      (5.4)     (2.5)     (0.7)
   Redemption of Kaiser preference stock............................................      (5.6)        -         -
   Restricted cash deposits (withdrawals), net......................................       7.4       0.2    (170.3)
   Treasury stock repurchases.......................................................      (2.9)    (12.8)        -
   Other............................................................................         -      (3.0)     (0.2)
                                                                                      ---------  --------  --------
        Net cash provided by (used for) financing activities........................     (50.9)     31.9    (177.5)
                                                                                      ---------  --------  --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS................................     (81.0)     77.5     (18.5)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR......................................     353.2     275.7     294.2
                                                                                      ---------  --------  --------
CASH AND CASH EQUIVALENTS AT END OF YEAR............................................  $  272.2   $ 353.2   $ 275.7
                                                                                      =========  ========  ========


   The accompanying notes are an integral part of these financial statements.


                          MAXXAM INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


1.    BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

   BASIS OF PRESENTATION

      The Company
      The consolidated financial statements include the accounts of MAXXAM Inc.
and its majority and wholly owned subsidiaries. All references to the "COMPANY"
include MAXXAM Inc. and its majority owned and wholly owned subsidiaries, unless
otherwise indicated or the context indicates otherwise. Intercompany balances
and transactions have been eliminated. Investments in affiliates (20% to
50%-owned) are accounted for utilizing the equity method of accounting.

      The Company is a holding company and, as such, conducts substantially all
of its operations through its subsidiaries. The Company operates in four
principal industries:

-     Aluminum, through its majority owned subsidiary, Kaiser Aluminum
      Corporation ("KAISER", 62% owned as of December 31, 2001), an aluminum
      producer. Kaiser, through its wholly owned principal operating subsidiary,
      Kaiser Aluminum & Chemical Corporation ("KACC"), operates in several
      principal aspects of the aluminum industry - the mining of bauxite (the
      major aluminum-bearing ore), the refining of bauxite into alumina (the
      intermediate material), the production of aluminum and the manufacture of
      fabricated and semi-fabricated aluminum products. Kaiser's production
      levels of alumina (before consideration of the Gramercy incident described
      in Note 3) and primary aluminum exceed its internal processing needs,
      which allows it to be a major seller of alumina and primary aluminum to
      domestic and international third parties. A substantial portion of the
      Company's consolidated assets, liabilities, revenues, results of
      operations and cash flows are attributable to Kaiser (see Note 2).

-     Forest products, through MAXXAM Group Inc. ("MGI") and MGI's wholly owned
      subsidiaries, The Pacific Lumber Company ("PACIFIC LUMBER") and Britt
      Lumber Co., Inc. ("BRITT"). MGI operates in several principal aspects of
      the lumber industry - the growing and harvesting of redwood and
      Douglas-fir timber, the milling of logs into lumber and the manufacture of
      lumber into a variety of finished products. Housing, construction and
      remodeling are the principal markets for the Company's lumber products.

-     Real estate investment and development, managed through its wholly owned
      subsidiary, MAXXAM Property Company. The Company, principally through its
      wholly owned subsidiaries, is engaged in the business of residential and
      commercial real estate investment and development, primarily in Arizona,
      Puerto Rico, California, and Texas.

-     Racing operations, through Sam Houston Race Park, Ltd. ("SHRP, LTD."), a
      Texas limited partnership, in which the Company currently owns a 100%
      interest. SHRP, Ltd. owns and operates a Class 1 pari-mutuel horse racing
      facility in the greater Houston metropolitan area and a pari-mutuel
      greyhound racing facility in Harlingen, Texas.

Results and activities for MAXXAM Inc. (excluding its subsidiaries) and for
MAXXAM Group Holdings Inc. ("MGHI") are not included in the above segments. MGHI
owns 100% of MGI and is a wholly owned subsidiary of the Company.

      Principles of Consolidation - Kaiser
      Under generally accepted accounting principles, consolidation is generally
required for investments of more than 50% of the outstanding voting stock of an
investee, except when control is not held by the majority owner. Under these
rules, legal reorganization or bankruptcy represent conditions which can
preclude consolidation in instances where control rests with the bankruptcy
court, rather than the majority owner. As discussed below, on February 12, 2002,
Kaiser and certain of its subsidiaries filed for reorganization under Chapter 11
of the United States Bankruptcy Code. As a result, Kaiser's financial results
were deconsolidated beginning February 12, 2002, and the Company began reporting
its investment in Kaiser using the cost method. As a result, the Company is
required to recognize amounts previously reported as Other Comprehensive Income
(a component of stockholders' deficit) in its income statement upon
deconsolidation. Those amounts are expected to be approximately $65 million. The
Company's losses recognized in excess of its investment in Kaiser are
significant ($450.2 million at December 31, 2001). The Company believes
additional losses related to its investment in Kaiser are not probable and,
accordingly, it expects to reverse its losses in excess of its investment in
Kaiser on February 12, 2002. Since Kaiser's results are no longer consolidated
as of February 12, 2002, any adjustments made to Kaiser's financial statements
subsequent to February 12, 2002 (relating to the recoverability and
classification of recorded asset amounts and classification of liabilities or
the effects on existing stockholders' equity as well as adjustments made to
Kaiser's financial information for loss contingencies and other matters
discussed in the notes to consolidated financial statements) are not expected to
impact the Company's financial results. No assurances can be given that the
Company's ownership interest in Kaiser will not be significantly diluted or
cancelled.

      The following condensed pro forma financial information reflects Kaiser's
results on a deconsolidated basis, but does not reflect the impact of reporting
the Company's investment in Kaiser on the cost method (in millions).

                                                                      YEAR ENDED
                                                                     DECEMBER 31,
                                                                         2001
                                                                    --------------
Revenues..........................................................  $       285.5
Costs and expenses................................................          311.0
                                                                    --------------
Operating income (loss)...........................................          (25.5)
MAXXAM's equity in Kaiser's losses................................         (421.6)
Other income (expenses) - net.....................................          (31.2)
Income tax benefit................................................           18.7
                                                                    --------------
Loss before extraordinary item....................................         (459.6)
Extraordinary item................................................            3.6
                                                                    --------------
Net loss..........................................................  $      (456.0)
                                                                    ==============



                                                                     DECEMBER 31,
                                                                         2001
                                                                    --------------
Current assets....................................................  $       398.2
Property, plant, and equipment (net)..............................          293.2
Investment in subsidiaries........................................            8.0
Other assets......................................................          538.1
                                                                    --------------
      Total assets................................................  $     1,237.5
                                                                    ==============
Current liabilities...............................................          133.8
Long-term debt, less current maturities...........................        1,003.6
Other liabilities.................................................          125.5
Losses recognized in excess of investment in Kaiser...............          450.2
                                                                    --------------
      Total liabilities...........................................        1,713.1
Stockholders' deficit.............................................         (475.6)
                                                                    --------------
      Total liabilities and stockholders' deficit.................  $     1,237.5
                                                                    ==============

      Reorganization Proceedings
      On February 12, 2002, Kaiser, KACC and 13 of KACC's wholly owned
subsidiaries filed separate voluntary petitions in the United States Bankruptcy
Court for the District of Delaware (the "COURT") for reorganization under
Chapter 11 of the United States Bankruptcy Code (the "CODE"). On March 15, 2002,
two additional wholly owned subsidiaries of KACC filed similar petitions.
Kaiser, KACC and the 15 subsidiaries of KACC that have filed petitions are
collectively referred to herein as the "Debtors" and the Chapter 11 proceedings
of these entities are collectively referred to herein as the "Cases." For
purposes of these financial statements, the term "Filing Date" shall mean with
respect to any particular Debtor, the date on which such Debtor filed its Case.
The wholly owned subsidiaries of KACC included in the Cases are: Kaiser Bellwood
Corporation, Kaiser Aluminium International, Inc., Kaiser Aluminum Technical
Services, Inc., Kaiser Alumina Australia Corporation (and its wholly owned
subsidiary, Kaiser Finance Corporation) and ten other entities with limited
balances or activities. None of Kaiser's non-U.S. affiliates were included in
the Cases. The Cases are being jointly administered with the Debtors managing
their businesses in the ordinary course as debtors-in-possession subject to the
control and supervision of the Court.

      The necessity for filing the Cases was attributable to the liquidity and
cash flow problems of Kaiser arising in late 2001 and early 2002. Kaiser was
facing significant near-term debt maturities at a time of unusually weak
aluminum industry business conditions, depressed aluminum prices and a broad
economic slowdown that was further exacerbated by the events of September 11,
2001. In addition, Kaiser had become increasingly burdened by the asbestos
litigation (see Note 16) and growing legacy obligations for retiree medical and
pension costs (see Note 13). The confluence of these factors created the
prospect of continuing operating losses and negative cash flow, resulting in
lower credit ratings and an inability to access the capital markets.

      The outstanding principal of, and accrued interest on, all long-term debt
of Kaiser became immediately due and payable as a result of the commencement of
the Cases. However, the vast majority of the claims in existence at the Filing
Date (including claims for principal and accrued interest and substantially all
legal proceedings) are stayed (deferred) while Kaiser continues to manage the
businesses. The Court has, however, upon motion by the Debtors, permitted the
Debtors to pay or otherwise honor certain unsecured pre-Filing Date claims,
including employee wages and benefits and customer claims in the ordinary course
of business, subject to certain limitations, and to fund, on an interim basis
pending a final determination of the issue by the Court, its joint ventures in
the ordinary course of business. The Debtors also have the right to assume or
reject executory contracts, subject to Court approval and certain other
limitations. In this context, "assumption" means that the Debtors agree to
perform their obligations and cure certain existing defaults under an executory
contract and "rejection" means that the Debtors are relieved from their
obligations to perform further under an executory contract and are subject only
to a claim for damages for the breach thereof. Any claim for damages resulting
from the rejection of an executory contract is treated as a general unsecured
claim in the Cases.

      Generally, pre-Filing Date claims against the Debtors will fall into two
categories: secured and unsecured, including certain contingent or unliquidated
claims. Under the Code, a creditor's claim is treated as secured only to the
extent of the value of the collateral securing such claim, with the balance of
such claim being treated as unsecured. Unsecured and partially secured claims do
not accrue interest after the Filing Date. A fully secured claim, however, does
accrue interest after the Filing Date until the amount due and owing to the
secured creditor, including interest accrued after the Filing Date, is equal to
the value of the collateral securing such claim. The amount and validity of
pre-Filing Date contingent or unliquidated claims, although presently unknown,
ultimately may be established by the Court or by agreement of the parties. As a
result of the Cases, additional pre-Filing Date claims and liabilities may be
asserted, some of which may be significant. No provision has been included in
the accompanying financial statements or the financial data and information of
Kaiser included herein for such potential claims and additional liabilities that
may be filed on or before a date to be fixed by the Court as the last day to
file proofs of claim.

      The following table sets forth certain 2001 financial information for the
Debtors compared to the consolidated financial information of Kaiser (in
millions).

                        CONDENSED BALANCE SHEET OF KAISER
                                DECEMBER 31, 2001


                                                         DEBTORS        KAISER
                                                      ------------   -------------

Current assets......................................  $     607.6    $      759.2
Investments in subsidiaries.........................      1,390.4            63.0
Intercompany receivables (payables).................     (1,004.0)              -
Property and equipment, net.........................        825.5         1,215.4
Deferred income taxes...............................        (66.6)              -
Other assets........................................        696.9           706.1
                                                      ------------   -------------
                                                      $   2,449.8    $    2,743.7
                                                      ============   =============

Current liabilities.................................  $     702.0    $      803.4
Other long-term liabilities.........................      1,510.2         1,562.1
Long-term debt......................................        678.7           700.8
Minority interests..................................            -           118.5
Stockholders' deficit...............................       (441.1)         (441.1)
                                                      ------------   -------------
                                                      $   2,449.8    $    2,743.7
                                                      ============   =============

                     CONDENSED STATEMENT OF INCOME OF KAISER
                      FOR THE YEAR ENDED DECEMBER 31, 2001


                                                           DEBTORS          KAISER
                                                        ------------  -------------

Net sales.............................................  $   1,252.8   $    1,732.7
Costs and expenses:
   Operating costs and expenses.......................      1,354.0        1,831.4
   Non-recurring operating items......................       (167.2)        (163.6)
                                                        ------------  -------------
Operating income......................................          66.0          64.9
Interest expense......................................       (106.5)        (109.0)
Other income (expense), net...........................        131.8          130.8
Provision for income tax..............................       (548.9)        (550.2)
Minority interests....................................            -            4.1
Equity in income of subsidiaries......................         11.7              -
                                                        ------------  -------------
Net loss..............................................  $    (445.9)  $     (459.4)
                                                        ============  =============


      Kaiser's objective is to achieve the highest possible recoveries for all
creditors and stockholders, consistent with the Debtors' abilities to pay and
the continuation of their businesses. However, there can be no assurance that
the Debtors will be able to attain these objectives or achieve a successful
reorganization. Further, there can be no assurance that the liabilities of the
Debtors will not be found to exceed the fair value of their assets. This could
result in claims being paid at less than 100% of their face value and the equity
of Kaiser's stockholders, including the Company, being diluted or cancelled.

      Under the Code, the rights of and ultimate payments to pre-Filing Date
creditors and stockholders may be substantially altered. At this time, it is not
possible to predict the outcome of the Cases, in general, or the effect of the
Cases on the businesses of the Debtors or on the interests of creditors and
stockholders.

      Two creditors' committees, one representing the unsecured creditors and
the other representing the asbestos claimants, have been appointed as official
committees in the Cases and, in accordance with the provisions of the Code, will
have the right to be heard on all matters that come before the Court. The
Debtors expect that the appointed committees, together with a legal
representative of potential future asbestos claimants to be appointed by the
Court, will play important roles in the Cases and the negotiation of the terms
of any plan or plans of reorganization. The Debtors are required to bear certain
of the committees' costs and expenses, including those of their counsel and
other advisors.

      The Debtors anticipate that substantially all liabilities of the Debtors
as of the date of the Filing will be resolved under one or more plans of
reorganization to be proposed and voted on in the Cases in accordance with the
provisions of the Code. Although the Debtors intend to file and seek
confirmation of such a plan or plans, there can be no assurance as to when the
Debtors will file such a plan or plans, or that such plan or plans will be
confirmed by the Court and consummated.

      As provided by the Code, the Debtors initially have the exclusive right to
propose a plan of reorganization for 120 days following the Filing Date. If the
Debtors fail to file a plan of reorganization during such period or any
extension thereof, or if such plan is not accepted by the requisite number of
creditors and equity holders entitled to vote on the plan, other parties in
interest in the Cases may be permitted to propose their own plan(s) of
reorganization for the Debtors.

      In March 2002, the Company filed a suit with the Court asking the Court to
find that it has no further obligations to the Debtors under certain tax
allocation agreements. The Company's suit is based on the assertion that the
agreements are personal contracts and financial accommodations which cannot be
assumed under the Code.

      On April 12, 2002, Kaiser filed with the Court a motion seeking an order
of the Court prohibiting the Company (or MGHI), without first seeking Court
relief, from making any disposition of its stock of Kaiser, including any sale,
transfer, or exchange of such stock or treating any of its Kaiser stock as
worthless for federal income tax purposes. Kaiser indicated in its Court filing
that it was concerned that such a transaction could have the effect of depriving
Kaiser of the ability to utilize the full value of its net operating losses,
foreign tax credits and minimum tax credits. The Company is in the process of
analyzing the motion and other materials which were filed with the Court.

      The financial information of Kaiser contained herein and consolidated with
the Company's results has been prepared on a "going concern" basis which
contemplates the realization of assets and the liquidation of liabilities in the
ordinary course of business; however, as a result of the commencement of the
Cases, such realization of assets and liquidation of liabilities are subject to
a significant number of uncertainties. Specifically, but not all inclusive, the
financial information of Kaiser for the year ended December 31, 2001, contained
herein does not present: (a) the classification of any long-term debt which is
in default as a current liability, (b) the realizable value of assets on a
liquidation basis or the availability of such assets to satisfy liabilities, (c)
the amount which will ultimately be paid to settle liabilities and contingencies
which may be allowed in the Cases, or (d) the effect of any changes which may be
made in connection with the Company's investment in Kaiser or with the Debtors'
operations resulting from a plan of reorganization. Because of the ongoing
nature of the Cases, the discussions and financial information of Kaiser
contained herein are subject to material uncertainties. However, since Kaiser's
results will no longer be consolidated with the Company's results and the
Company believes additional losses related to its investment in Kaiser are not
probable, the material uncertainties related to Kaiser (and disclosed herein)
are not expected to impact the Company's financial results subsequent to the
Filing Date.

      Use of Estimates and Assumptions
      The preparation of financial statements in accordance with generally
accepted accounting principles requires the use of estimates and assumptions
that affect (i) the reported amounts of assets and liabilities, (ii) the
disclosure of contingent assets and liabilities known to exist as of the date
the financial statements are published and (iii) the reported amount of revenues
and expenses recognized during each period presented. The Company reviews all
significant estimates affecting its consolidated financial statements on a
recurring basis and records the effect of any necessary adjustments prior to
filing the consolidated financial statements with the Securities and Exchange
Commission. Adjustments made using estimates often relate to improved
information not previously available. Uncertainties regarding such estimates and
assumptions are inherent in the preparation of the Company's consolidated
financial statements; accordingly, actual results could differ from estimates,
and it is possible that the subsequent resolution of any one of the contingent
matters described in Note 16 could differ materially from current estimates. The
results of an adverse resolution of such uncertainties could have a material
effect on the Company's consolidated financial position, results of operations
or liquidity.

      Reclassifications and Other Matters
      Certain reclassifications have been made to prior years' consolidated
financial statements to be consistent with the current year's presentation.

   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

      Prepaid Expenses and Other Current Assets; Long-term Receivables and Other
      Assets
      Direct costs associated with the preparation of timber harvesting plans
("THPS") are capitalized and reflected in prepaid expenses and other current
assets on the balance sheet. These costs are expensed as the timber covered by
the related THP is harvested. Costs associated with the preparation of a
sustained yield plan ("SYP") and a multi-species habitat conservation plan
("HCP") are capitalized and reflected in long-term receivables and other assets.
These costs are being amortized over 10 years.

      Timber and Timberlands
      Timber and timberlands are stated at cost, net of accumulated depletion.
Depletion is computed utilizing the unit-of-production method based upon
estimates of timber quantities. Periodically, the Company will reassess its
depletion rates considering currently estimated merchantable timber and will
adjust depletion rates prospectively.

      Concentrations of Credit Risk
      Cash equivalents and restricted marketable securities are invested
primarily in investment grade debt instruments as well as other types of
corporate and government debt obligations. The Company mitigates its
concentration of credit risk with respect to these investments by generally
purchasing high grade investments (ratings of A1/P1 short-term or at least AA/aa
long-term debt). No more than 10% is invested in the same issue. Unrestricted
marketable securities are invested in debt securities, corporate common stocks
and option contracts. These investments are held in a limited partnership
interest managed by a financial institution.

      Revenue Recognition
      The Company recognizes revenues for alumina, primary aluminum and
fabricated aluminum products when title, ownership and risk of loss pass to the
buyer. Rental revenue on operating leases is recognized on a straight-line basis
over the term of the lease.

      Revenues from the sale of logs, lumber products and by-products are
recorded when the legal ownership and the risk of loss passes to the buyer,
which is generally at the time of shipment.

      The Company recognizes income from land sales in accordance with Statement
of Financial Accounting Standards ("SFAS") No. 66, "Accounting for Sales of Real
Estate" ("SFAS NO. 66"). In accordance with SFAS No. 66, certain real estate
sales are accounted for under the percentage of completion method, whereby
income is recognized based on the estimated stage of completion of individual
contracts. The unrecognized income associated with such sales has been recorded
as deferred real estate sales and is reflected in other noncurrent liabilities
on the balance sheet. Additionally, in certain circumstances the cost recovery
or installment method is used whereby the gross profit associated with these
transactions is deferred and recognized when appropriate. The unrecognized
income associated with such sales is reflected as a reduction of long-term
receivables and other assets in the balance sheet.

      The Company recognizes revenues from net pari-mutuel commissions received
on live and simulcast horse and greyhound racing in the period in which the
performance occurred. These revenues are net of certain payments determined in
accordance with state regulations and contracts. The Company also receives
revenues in the form of fees paid by other racetracks for the broadcast of the
Company's live races to the offsite locations. Other sources of revenue include
food and beverage sales, admission and parking fees, corporate sponsorships and
advertising, club memberships, suite rentals and other miscellaneous items.

      Deferred Financing Costs
      Costs incurred to obtain debt financing are deferred and amortized over
the estimated term of the related borrowing.

      Foreign Currency
      The Company uses the United States dollar as the functional currency for
its foreign operations.

      Derivative Financial Instruments
      Kaiser utilizes derivative financial instruments primarily to mitigate its
exposure to changes in prices for certain of the products which Kaiser sells and
consumes and, to a lesser extent, to mitigate its exposure to changes in foreign
currency exchange rates. Kaiser does not utilize derivative financial
instruments for trading or other speculative purposes. Kaiser's derivative
activities are initiated within guidelines established by management and
approved by Kaiser's Board of Directors. Hedging transactions are executed
centrally on behalf of all of Kaiser's business segments to minimize transaction
costs, monitor consolidated net exposures and allow for increased responsiveness
to changes in market factors. See Note 17.

      Accounting standards in place through December 31, 2000, provided that any
interim fluctuations in option prices prior to the settlement date were deferred
until the settlement date of the underlying hedged transaction, at which time
they were recorded in net sales or cost of sales and operations (as applicable)
together with the related premium cost. No accounting recognition was accorded
to interim fluctuations in prices of forward sales contracts. Hedge (deferral)
accounting would have been terminated (resulting in the applicable derivative
positions being marked-to-market) if the level of underlying physical
transactions ever fell below the net exposure hedged. This did not occur in 1999
or 2000.

      Effective January 1, 2001, the Company adopted SFAS No. 133, "Accounting
for Derivative Financial Instruments and Hedging Activities" ("SFAS NO. 133")
which requires companies to recognize all derivative instruments as assets or
liabilities in the balance sheet and to measure those instruments at fair value
by "marking-to-market" all of their hedging positions at each period-end (see
Note 17). This contrasts with pre-2001 accounting principles, which generally
only require certain "non-qualifying" hedging positions to be marked-to-market.
Changes in the market value of the open hedging positions resulting from the
mark-to-market process instruments represent unrealized gains or losses. Such
unrealized gains or losses will fluctuate, based on prevailing market prices at
each subsequent balance sheet date, until the transaction occurs. Under SFAS No.
133, these changes are recorded as an increase or reduction in stockholders'
equity through either other comprehensive income or net income, depending on the
facts and circumstances with respect to the hedge and its documentation. To the
extent that changes in the market values of Kaiser's hedging positions are
initially recorded in other comprehensive income, such changes are reclassified
from other comprehensive income (offset by any fluctuations in other "open"
positions) and are recorded in net income (included in net sales or cost of
sales and operations, as applicable) when the subsequent physical transactions
occur. Additionally, under SFAS No. 133, if the level of physical transactions
ever falls below the net exposure hedged, "hedge" accounting must be terminated
for such "excess" hedges. In such an instance, the mark-to-market changes on
such excess hedges would be recorded in income rather than in other
comprehensive income. This did not occur during 2001.

      SFAS No. 133 requires that, as of the date of initial adoption, the
difference between the market value of derivative instruments recorded on the
Company's consolidated balance sheet and the previous carrying amount of those
derivatives be reported in net income or other comprehensive income, as
appropriate, as the cumulative effect of a change in accounting principle. Based
on authoritative accounting literature issued during the first quarter of 2001,
it was determined that all of the cumulative impact of adopting SFAS No. 133
should be recorded in other comprehensive income. The cumulative effect amount
was reclassified to earnings during 2001. As a result of losses reported with
respect to the Company's investment in Kaiser, no significant additional amounts
relating to Kaiser's derivative activities are expected to be recorded by the
Company in 2002.

      Per Share Information
      Basic earnings (loss) per share is calculated by dividing net income
(loss) by the weighted average number of common shares outstanding during the
period, including the weighted average impact of the shares of Common Stock
issued and treasury stock acquired during the year from the date of issuance or
repurchase and the dilutive effect of Class A Preferred Stock (which is
convertible into Common Stock). Prior to 2001, the dilutive effect of the Class
A Preferred Stock was not included in the determination of basic earnings per
share. However, in April 2001, the Financial Accounting Standards Board ("FASB")
clarified that securities which are convertible into common stock and
participate in common stock dividends should be used in computing basic earnings
per share if the effect is dilutive. Therefore the Class A Preferred Stock is
included in the weighted average number of common and common equivalent shares
for purposes of computing basic earnings per share for the periods in which the
effect is dilutive. Basic earnings per share for the years ended December 31,
2000 and 1999, have been restated from that which was previously reported to
reflect the new guidance. Diluted earnings per share calculations also include
the dilutive effect of common and preferred stock options.


                                                                             2001            2000           1999
                                                                         -------------    -----------    -----------
Weighted average shares outstanding:
   Common Stock.........................................................    6,581,979      6,910,358      7,013,547
   Effect of dilution:
      Class A Preferred Stock...........................................            - (2)    668,510        668,590
                                                                         -------------    -----------    -----------
Weighted average number of common and common equivalent
    shares - Basic......................................................    6,581,979      7,578,868       7,682,137
   Effect of dilution:
      Stock options.....................................................            - (2)      1,568 (1)      73,010(1)
                                                                         -------------    -----------    -----------
Weighted average number of common and common equivalent
    shares - Diluted....................................................    6,581,979       7,580,436      7,755,147
                                                                         =============    ===========    ===========
------------------

(1)  Options to purchase 482,475, 483,575 and 239,275 shares of Common Stock
     outstanding during the years ended December 31, 2001, 2000 and 1999,
     respectively, were not included in the computation of diluted earnings per
     share because the options' exercise prices were greater than the average
     market price of the Common Stock.
(2)  The Company had a loss for the year ended December 31, 2001; the Class A
     Preferred Stock and options were therefore not included in the computation
     of earnings per share for the period.


      New Accounting Standards
      In June 2001, the Financial Accounting Standards Board issued SFAS Nos.
141, "Business Combinations" ("SFAS NO. 141") and SFAS No. 142, "Goodwill and
Other Intangible Assets" ("SFAS NO. 142"). SFAS No. 141 requires all business
combinations initiated after June 30, 2001, to be accounted for using the
purchase method. Under SFAS No. 142, goodwill is no longer subject to
amortization over its estimated useful life. Instead, goodwill will be subject
to at least an annual assessment for impairment by applying a fair-value-based
test. Separable intangible assets that have finite lives will continue to be
amortized over their useful lives. The provisions of SFAS No. 142 apply to all
business combinations initiated after June 30, 2001, and are required to be
implemented effective January 1, 2002. Through the year ended December 31, 2001,
the goodwill associated with Kaiser's acquisition of the Chandler, Arizona
facility (see Note 5) was being amortized on a straight-line basis over 20
years. Beginning with the first quarter of 2002, Kaiser discontinued the
amortization of goodwill consistent with SFAS No. 142. However, the
discontinuance of amortization of goodwill will not have a material effect on
the Company's results). In addition, the Company will review goodwill for
impairment at least annually. As of December 31, 2001, unamortized goodwill
(which was attributable solely to subsidiaries of Kaiser) was approximately
$11.4 million and was included in long-term receivables and other assets in the
accompanying consolidated balance sheets. This unamortized goodwill will be
eliminated at deconsolidation on February 12, 2002. The Company does not
currently expect the adoption of SFAS No. 141 and 142 to have a material impact
on its financial statements.

      In June 2001, the Financial Accounting Standards Board issued SFAS No.
143, "Accounting for Asset Retirement Obligations" ("SFAS NO. 143"), which
addresses accounting and reporting standards for obligations associated with the
retirement of tangible long-lived assets and the related asset retirement costs.
The Company is required to adopt SFAS No. 143 beginning on January 1, 2003. In
general, SFAS No. 143 requires the recognition of a liability resulting from
anticipated asset retirement obligations, offset by an increase in the value of
the associated productive asset for such anticipated costs. Over the life of the
asset, depreciation expense is to include the ratable expensing of the
retirement cost included with the asset value. The statement applies to all
legal obligations associated with the retirement of a tangible long-lived asset
that results from the acquisition, construction, or development and (or) the
normal operation of a long-lived asset, except for certain lease obligations.
Excluded from this statement are obligations arising solely from a plan to
dispose of a long-lived asset and obligations that result from the improper
operation of an asset (i.e. the type of environmental obligations discussed in
Note 16).

      The Company's consolidated financial statements already reflect
reclamation obligations by Kaiser's bauxite mining operations in accordance with
accounting policies consistent with SFAS No. 143. At December 31, 2001, the
amount of the accrued reclamation obligations included in the consolidated
financial statements was approximately $3.1 million after considering
expenditures in 2001 of approximately $3.0 million. The Company is continuing
its evaluation of SFAS No. 143. A decision as to the formal adoption of SFAS No.
143 has not been made with respect to any other items that may be applicable.
However, the Company does not currently expect the adoption of SFAS No. 143 to
have a material impact on its future financial statements.

      In August 2001, the Financial Accounting Standards Board issued SFAS No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS NO.
144"), which sets forth new guidance for accounting and reporting for impairment
or disposal of long-lived assets. The provisions of SFAS 144 are effective for
the Company beginning on January 1, 2002. Based on presently available
estimates, the new impairment and disposal rules are not expected to result in
the recognition of material impairment losses in 2002 beyond those reported as
of December 31, 2001 (See Note 2). In addition to the new guidance on
impairments, SFAS No. 144 broadens the applicability of the provisions of
Accounting Principles Board Opinion 30 for the presentation of discontinued
operations in the income statement to include a component of an entity (rather
than a segment of a business). A component of an entity comprises operations and
cash flows that can be clearly distinguished, operationally and for financial
reporting purposes, from the rest of the entity. Effective after December 31,
2001, when the Company commits a plan of sale of a component of an entity, such
component will be presented as a discontinued operation if the operations and
cash flows of the component will be eliminated from the ongoing operations of
the entity and the entity will not have any significant continuing involvement
in the operations of the component. Although this provision will not affect the
total amount reported for net income, the income statements of prior periods
will be reclassified to report the results of operations of the component
separately when a component of an entity is reported as a discontinued
operation. The Company does not currently expect the adoption of SFAS No. 144 to
have a material impact on its financial statements.

2.    SEGMENT INFORMATION AND SPECIAL CHARGES

      Reportable Segments
      As discussed in Note 1, the Company is a holding company with four
reportable segments; its operations are organized and managed as distinct
business units which offer different products and services and are managed
separately through the Company's subsidiaries.

      The accounting policies of the segments are the same as those described in
Note 1. The Company evaluates segment performance based on profit or loss from
operations before income taxes and minority interests.

      The following table presents financial information by reportable segment
(in millions).



                                                      FOREST       REAL       RACING                  CONSOLIDATED
                          DECEMBER 31,   ALUMINUM    PRODUCTS     ESTATE    OPERATIONS    CORPORATE       TOTAL
                          -----------  ------------ -----------  --------  ------------ ------------ --------------
Net sales to unaffiliated
   customers                 2001      $   1,732.7  $    185.3   $  69.1   $      31.1  $         -  $     2,018.2
                             2000          2,169.8       200.1      47.2          30.9            -        2,448.0
                             1999          2,083.6       187.8      52.0          27.3            -        2,350.7

Operating income (loss)      2001             70.8       (27.5)     10.9           0.9         (9.7)          45.4
                             2000            145.2         7.6      (7.8)          2.1        (16.5)         130.6
                             1999            (23.0)       (4.1)     (5.2)          3.8        (23.0)         (51.5)

Investment, interest and
   other income (expense),
   net                       2001            (32.8)       11.3      12.5           0.1          9.9            1.0
                             2000             (4.3)       20.5      24.7             -         21.8           62.7
                             1999            (35.9)       26.9      21.1          (0.2)         6.4           18.3

Interest expense             2001            109.0        60.1       8.6             -         13.0          190.7
                             2000            109.6        64.2       2.4             -         16.8          193.0
                             1999            110.1        66.5       2.2           0.5         17.8          197.1

Depreciation, depletion
   and amortization          2001             84.3        19.4       7.6           1.5          0.3          113.1
                             2000             71.0        19.7       5.5           1.4          0.6           98.2
                             1999             83.6        17.0       6.2           1.1          0.5          108.4

Income (loss) before
   income taxes, minority
   interests and
   extraordinary items       2001             92.6       (59.6)     14.8           1.0        (12.8)          36.0
                             2000             31.3        23.9      14.5           2.1        (11.5)          60.3
                             1999            (84.0)      196.1      13.7           3.1        (34.4)          94.5

Capital expenditures         2001            148.7        13.4     133.9           2.0          0.7          298.7
                             2000            296.5        14.0       6.9           4.5          1.0          322.9
                             1999             68.4        23.1       3.1           0.6          0.6           95.8

Investments in aadvances
   to unconsolidated
   affiliates                2001             63.0           -       7.9             -            -           70.9
                             2000             77.8           -       7.7             -            -           85.5

Total assets                 2001          2,699.1       610.8     300.0          40.4        285.0        3,935.3
                             2000          3,292.5       726.3     165.4          40.8        279.0        4,504.0

      Operating income (loss) in the column entitled "Corporate" represents
general and administrative expenses not directly attributable to the reportable
segments. This column also serves to reconcile the total of the reportable
segments' amounts to totals in the Company's consolidated financial statements.

      Non-recurring Items

      Aluminum
      The aluminum segment's operating income (loss) for the years ended
December 31, 2001, 2000 and 1999 includes the impact of certain non-recurring
items as shown in the following table. These items are included in cost of sales
and operations and in impairment of assets in the Consolidated Statement of
Operations.

                                                                                     YEARS ENDED DECEMBER 31,
                                                                               ------------------------------------
                                                                                  2001         2000        1999
                                                                               -----------  ----------  -----------
Net gains on power sales (Note 4)............................................  $    229.2   $   159.5   $        -
Restructuring charges........................................................       (35.2)       (9.4)           -
Contractual labor costs related to smelter curtailments......................       (12.7)          -            -
Labor settlement charge......................................................           -       (38.5)           -
Impairment charges:
   Washington smelters (Note 4)..............................................           -       (33.0)           -
   Charges associated with product line exits................................           -       (18.2)           -
   Trentwood equipment (Note 8)..............................................       (17.7)          -            -
   Micromill (Note 5)........................................................           -           -        (19.1)
Gramercy related items (Note 3):
   Incremental maintenance...................................................           -       (11.5)           -
   Insurance deductibles, etc................................................           -           -         (5.0)
   LIFO inventory charge.....................................................           -        (7.0)           -
                                                                               -----------  ----------  -----------
                                                                               $    163.6   $    41.9   $    (24.1)
                                                                               ===========  ==========  ===========

      During 2001, Kaiser launched a performance improvement initiative. The
program resulted in restructuring charges totaling $35.2 million which consisted
of $17.9 million of employee benefit and related costs for a group of
approximately 355 salaried and hourly job eliminations, an inventory charge of
$5.6 million (see Note 7) and third party consulting costs of $11.7 million. As
of December 31, 2001, approximately 340 of the job eliminations had occurred. It
is anticipated that the remaining job eliminations will occur during the first
quarter of 2002 or soon thereafter. Approximately $7.7 million of the employee
benefit and related costs were cash costs that have been incurred or will be
incurred during the first quarter of 2002. The balance of the employee benefit
and related costs represent increased pension and post-retirement medical costs
that will be funded over longer periods. Additional cash and non-cash charges
may be required in the future as the program continues. Such additional charges
could be material.

      The 2000 restructuring charges were associated with Kaiser's primary
aluminum and corporate business units. During 2000, these initiatives resulted
in restructuring charges for employee benefit and other costs for approximately
50 job eliminations at Kaiser's Tacoma facility and approximately 50 employee
eliminations due to consolidation or elimination of certain corporate staff
functions. At December 31, 2001, all job eliminations associated with these
initiatives had occurred.

      From September 1998 through September 2000, Kaiser and the United
Steelworkers of America ("USWA") were involved in a labor dispute as a result of
the September 1998 USWA strike and the subsequent "lock-out" by Kaiser in
February 1999. The labor dispute was settled in September 2000. Under the terms
of the settlement, USWA members generally returned to the affected plants during
October 2000. Kaiser recorded a one-time pre-tax charge of $38.5 million in 2000
to reflect the incremental, non-recurring impacts of the labor settlement,
including severance and other contractual obligations for non-returning workers.

      The impairment charges reflected in 2000 of $18.2 million associated with
product exits relate to the exit from the can body stock product line and the
exit from a marginal product line within the engineered products operations. The
charges include $12.0 million in LIFO inventory charges and $6.2 million in
charges to reduce the carrying amount of certain assets.

      The aluminum segment's income (loss) before income taxes and minority
interests for the years ended December 31, 2001, 2000 and 1999 includes the net
impact of certain non-recurring amounts included in investment, interest and
other income (expense), net, as shown in the following table:


                                                                                     YEARS ENDED DECEMBER 31,
                                                                                -----------------------------------
                                                                                   2001        2000         1999
                                                                                ----------  ----------   ----------
Asbestos-related charges (Note 16)..............................................$   (57.2)  $   (43.0)   $   (53.2)
Gain on sale of real estate (Note 5)............................................      6.9        22.0            -
Mark-to-market gains (losses) (Note 17).........................................     35.6        11.0        (32.8)
Adjustment to environmental liabilities (Note 16)...............................    (13.5)          -            -
MetalSpectrum Investment write-off (Note 5).....................................     (2.8)          -            -
Lease obligation adjustment (Note 16)...........................................        -        17.0            -
Gain on sale of interests in AKW (Note 5).......................................        -           -         50.5
                                                                                ----------  ----------   ----------
                                                                                $   (31.0)  $      7.0   $   (35.5)
                                                                                ==========  ==========   ==========
      Forest Products
      During 2001, comprehensive external and internal reviews were conducted of
Pacific Lumber's business operations. These reviews were an effort to identify
ways in which Pacific Lumber could operate on a more efficient and cost
effective basis. Based upon the results of these reviews, Pacific Lumber has,
among other things, indefinitely curtailed two of its four operating sawmills,
eliminated certain of its operations, including its soil amendment and concrete
block manufacturing operations, begun utilizing more efficient harvesting
methods and adopted certain other cost saving measures. Most of these
operational changes were implemented by Pacific Lumber during the last quarter
of 2001, or during the first quarter of 2002. Pacific Lumber also terminated its
internal logging operations as of April 1, 2002, and intends to rely on third
party contract loggers to conduct these activities.

      In connection with the idling of two of the Company's sawmills discussed
above, the Company recorded a charge to operating costs of $0.8 million to
write-down the carrying amount of the buildings to estimated fair value. AS OF
December 31, 2001, the Company had not committed to a plan to dispose of the
buildings. In addition, the Company identified machinery and equipment with a
carrying amount of $2.0 million that it no longer needed for its current or
future operations and committed to a plan in 2001 to dispose of it during 2002.
The appraised fair value of the machinery and equipment, net of related costs to
sell, is $0.6 million. Accordingly, the Company recorded an impairment charge to
operating costs of $1.4 million in 2001 for assets to be disposed of.

      A $2.6 million restructuring charge was recorded in 2001 reflecting cash
termination benefits associated with the separation of approximately 305
employees as part of an involuntary termination plan. As of December 31, 2001,
168 of the affected employees had left the Company. The remainder are expected
to leave by the second quarter of 2002. Cash termination benefits of $0.6
million were paid in the fourth quarter of 2001, and are included in operating
costs. The remaining balance of $2.0 million is expected to be paid by the
second quarter of 2002.

      Additionally, the Company recorded an environmental remediation charge of
$3.4 million in 2001. The environmental accrual represents the Company's
estimate of costs reasonably expected to be incurred based on presently enacted
laws and regulations, currently available facts, existing technology, and the
Company's assessment of the likely remediation actions to be taken. The Company
expects that $0.7 million of this remediation liability will be incurred during
2002. Based on management's best estimates given the current facts and
circumstances, the remaining $2.7 million is expected to be incurred from 2003
through 2005.

      The forest products segment's income (loss) before income taxes and
minority interests included non-recurring, non-operating pre-tax gains on the
sale of a portion of the Grizzly Creek grove of $16.7 million in November 2001,
$60.0 million on the sale of the Owl Creek grove in December 2000, and $239.8
million on the sale of the Headwaters Timberlands in March 1999. See Note 5.

      Real Estate
      Investment, interest and other income (expense) for real estate includes
net gains from sales of operating assets and equity in earnings from real estate
joint ventures of $5.5 million, $19.2 million and $8.9 million for the years
ended December 31, 2001, 2000 and 1999, respectively. investment, interest and
other income (expense) for real estate also includes $11.3 million related to
the gain on the sale of a water company in Arizona in 2000.

      Product Sales
      The following table presents segment sales by primary products (in
millions).

                                                                 YEARS ENDED DECEMBER 31,
                                                            -----------------------------------
                                                               2001        2000        1999
                                                            ----------  ----------  -----------
Aluminum:
   Bauxite and alumina....................................  $   586.2   $   590.5   $    524.8
   Primary aluminum.......................................      362.7       806.0        673.5
   Flat-rolled products...................................      308.0       521.0        591.3
   Engineered products....................................      429.5       564.9        556.8
   Commodities marketing..................................       22.9       (25.4)        18.3
   Minority interests and eliminations....................       23.4      (287.2)      (281.1)
                                                            ----------  ----------  -----------
      Total aluminum sales................................  $ 1,732.7   $ 2,169.8   $  2,083.6
                                                            ==========  ==========  ===========

Forest products:
   Lumber.................................................  $   152.2   $   175.3   $    165.3
   Other forest products..................................       33.1        24.8         22.5
                                                            ----------  ----------  -----------
      Total forest product sales..........................  $   185.3   $   200.1   $    187.8
                                                            ==========  ==========  ===========

Real estate:
   Real estate and development............................  $    48.2   $    26.5   $     34.2
   Resort and other commercial operations.................       20.9        20.7         17.8
                                                            ----------  ----------  -----------
      Total real estate sales.............................  $    69.1   $    47.2   $     52.0
                                                            ==========  ==========  ===========

Racing operations:
   Net commissions from wagering..........................  $    20.5   $    20.3   $     18.1
   Other..................................................       10.6        10.6          9.2
                                                            ----------  ----------  -----------
      Total racing sales..................................  $    31.1   $    30.9   $     27.3
                                                            ==========  ==========  ===========

      Geographical Information
      The Company's operations are located in many foreign countries, including
Australia, Canada, Ghana, Jamaica, and the United Kingdom. Foreign operations in
general may be more vulnerable than domestic operations due to a variety of
political and other risks. Sales and transfers among geographic areas are made
on a basis intended to reflect the market value of products. Long-lived assets
include property, plant and equipment-net, timber and timberlands-net, real
estate held for development and sale, and investments in and advances to
unconsolidated affiliates. geographical information for net sales, based on
countries of origin, and long-lived assets follows (in millions):


                                                       UNITED                                  OTHER
                                     DECEMBER 31,      STATES       JAMAICA       GHANA       FOREIGN      TOTAL
                                    ---------------  ----------- ------------- -----------  ----------  -----------
Net sales to unaffiliated customers      2001        $  1,302.8  $      219.4  $    221.3   $   274.7   $  2,018.2
                                         2000           1,628.3         298.5       237.5       283.7      2,448.0
                                         1999           1,706.7         233.1       153.2       257.7      2,350.7

Long-lived assets                        2001           1,417.7         303.8        83.3        58.8      1,863.6
                                         2000           1,266.4         290.3        80.8        73.8      1,711.3

      Major Customers and Export Sales
      For the years ended December 31, 2001, 2000 and 1999, sales to any one
customer did not exceed 10% of consolidated revenues. export sales were less
than 10% of total revenues in 2001, 2000 and 2000

3.    INCIDENT AT GRAMERCY FACILITY

      In July 1999, Kaiser's Gramercy, Louisiana, alumina refinery was
extensively damaged by an explosion in the digestion area of the plant. A number
of employees were injured in the incident, several of them severely. As a result
of the incident, alumina production at the facility was completely curtailed.
Construction on the damaged part of the facility began during the first quarter
of 2000. Initial production at the plant commenced during the middle of December
2000. However, construction was not substantially completed until the third
quarter of 2001. During the first nine months of 2001, the plant operated at
approximately 68% of its newly-rated estimated capacity of 1,250,000 tons.
During the fourth quarter of 2001, the plant operated at approximately 90% of
its newly-rated capacity. By the end of February 2002 the plant was operating at
just below 100% of its newly-rated capacity. The facility is now focusing its
efforts on achieving its full operating efficiency.

      Property Damage
      Kaiser's insurance policies provided that it would be reimbursed for the
costs of repairing or rebuilding the damaged portion of the facility using new
materials of like kind and quality with no deduction for depreciation. In 1999,
based on discussions with the insurance carriers and their representatives and
third party engineering reports, Kaiser recorded a pre-tax gain of $85.0
million, representing the difference between the minimum expected property
damage reimbursement amount of $100.0 million and the net carrying value of the
damaged property of $15.0 million. The reimbursement amount was collected in
2000.

      Clean-up, Site Preparation and Other Costs/Losses
      The following table recaps clean-up, site preparation and other
costs/losses associated with the Gramercy incident (in millions):


                                                                     2001       2000      1999      TOTAL
                                                                 ------------ --------  --------  ---------
Clean-up and site preparation................................... $         -  $  10.0   $  14.0   $   24.0
Business interruption costs.....................................        36.6    110.0      41.0      187.6
Abnormal start-up costs.........................................        64.9        -         -       64.9
Litigation costs................................................         6.5        -         -        6.5
                                                                 ------------ --------  --------  ---------
                                                                       108.0    120.0      55.0      283.0
Offsetting business interruption insurance recoveries
   reflected in cost of sales and operations....................       (36.6)  (120.0)    (55.0)    (211.6)
                                                                 ------------ --------  --------  ---------
Net impacts reflected in cost of sales and operations........... $      71.4  $     -   $     -   $   71.4
                                                                 ============ ========  ========  =========

      During July 2001, Kaiser and its insurers reached a global settlement
agreement in respect of all of Kaiser's business interruption and property
damage claims attributable to the Gramercy incident. As a result, Kaiser does
not expect any additional insurance recoveries in respect of the Gramercy
incident.

      Depreciation expense for the first six months of 1999 was approximately
$6.0 million. Kaiser suspended depreciation at the facility starting in July
1999 since production was completely curtailed. However, in accordance with an
agreement with Kaiser's insurers, during 2000, Kaiser recorded a depreciation
charge of $14.3 million, representing the previously unrecorded depreciation
related to the undamaged portion of the facility for the period from July 1999
through November 2000. However, this charge did not have any impact on Kaiser's
operating results as Kaiser had reflected (as a reduction of depreciation
expense) an equal and offsetting insurance receivable (incremental to the
amounts discussed in the preceding paragraph) since the insurers agreed to
reimburse Kaiser for this amount. Since production at the facility was partially
restored during December 2000, normal depreciation commenced in December 2000.

      Contingencies
      The Gramercy incident resulted in a significant number of individual and
class action lawsuits being filed against Kaiser and others alleging, among
other things, property damage, business interruption losses by other businesses
and personal injury. After these matters were consolidated, the individual
claims against Kaiser were settled for amounts which, after the application of
insurance, were not material to Kaiser. Further, an agreement has been reached
with the class plaintiffs for an amount which, after the application of
insurance, is not material to Kaiser. While the class settlement remains subject
to court approval and while certain plaintiffs may opt out of the settlement,
Kaiser does not currently believe that this presents any material risk to
Kaiser. Finally, Kaiser faces new claims from certain parties to the litigation
regarding the interpretation of and alleged claims concerning certain settlement
and other agreements made during the course of the litigation. The aggregate
amount of damages threatened in these claims could, in certain circumstances, be
substantial. However, Kaiser's management does not believe these claims will
result in any material liability to Kaiser.

      Kaiser currently believes that any amount from unsettled workers'
compensation claims from the Gramercy incident in excess of the coverage
limitations will not have a material effect on Kaiser's consolidated financial
position or liquidity. However, while unlikely, it is possible that as
additional facts become available, additional charges may be required and such
charges could be material to the period in which they are recorded.

4.    PACIFIC NORTHWEST POWER SALES AND OPERATING LEVEL

      Power Sales
      In response to the unprecedented high market prices for power in the
Pacific Northwest, Kaiser (first partially and then fully) curtailed the primary
aluminum production at its Tacoma and Mead, Washington, smelters during the last
half of 2000 and all of 2001. As a result of the curtailments, and as permitted
under the BPA contract, Kaiser sold the power that it had under contract through
September 30, 2001 (the end of the contract period). In connection with such
power sales, Kaiser recorded net pre-tax gains of approximately $229.2 million
in 2001 and $159.5 million in 2000. Gross proceeds were offset by
employee-related expenses, a non-cash LIFO inventory charge and other fixed
commitments. The resulting net gains have been reflected as non-recurring items
(see Note 2). The net gain amounts were composed of gross proceeds of $259.5
million in 2001 and $207.8 million in 2000, of which $347.5 million was received
in 2001 and $119.8 million was received in 2000 (although a portion of such
proceeds represent a replacement of the profit that would have otherwise been
generated through operations).

      Future Power Supply and its Impact on Future Operating Rate
      During October 2000, Kaiser signed a new power contract with the BPA under
which the BPA, starting October 1, 2001, was to provide Kaiser's operations in
the State of Washington with approximately 290 megawatts of power through
September 2006. The contract provides Kaiser with sufficient power to fully
operate its Trentwood facility (which requires up to an approximate 40
megawatts) as well as approximately 40% of the combined capacity of Kaiser's
Mead and Tacoma aluminum smelting operations. The BPA has announced that it
currently intends to set rates under the contract in six month increments. The
rate for the initial period (from October 1, 2001 through March 31, 2002) was
approximately 46% higher than power costs under the prior contract. Power prices
for the April 2002 through September 2002 period are essentially unchanged from
the prior six-month rate. Kaiser cannot predict what rates will be charged in
future periods. Such rates will be dependent on such factors as the availability
of and demand for electrical power, which are largely dependent on weather, the
price for alternative fuels, particularly natural gas, as well as general and
regional economic and ecological factors. The contract also includes a
take-or-pay requirement and clauses under which Kaiser's power allocation could
be curtailed, or its costs increased, in certain instances. Under the contract,
Kaiser can only remarket its power allocation to reduce or eliminate take-or-pay
requirements. Kaiser is not entitled to receive any profits from any such
remarketing efforts. During October 2001, Kaiser and the BPA reached an
agreement whereby: (i) Kaiser would not be obligated to pay for potential
take-or-pay obligations in the first year of the contract; and (ii) Kaiser
retained its rights to restart its smelter operations at any time. In return for
the foregoing, Kaiser granted the BPA certain limited power interruption rights
in the first year of the contract if Kaiser is operating its Northwest smelters.
The Department of Energy acknowledged that capital spending in respect of the
Gramercy refinery was consistent with the contractual provisions of the prior
contract with respect to the use of power sale proceeds. Beginning in October
2002, unless there is a further amendment of Kaiser's obligations, Kaiser could
be liable for take-or-pay costs under the BPA contract, and such amounts could
be significant. Kaiser is reviewing its rights and obligations in respect of the
BPA contract in light of the Cases.

      Subject to the limited interruption rights granted to the BPA (described
above), or any impact resulting from the Cases, Kaiser has sufficient power
under contract, and retains the ability, to restart up to 40% (4.75 potlines) of
its Northwest smelting capacity. Were Kaiser to restart additional capacity (in
excess of 4.75 potlines), it would have to purchase additional power from the
BPA or other suppliers. For Kaiser to make such a decision, it would have to be
able to purchase such power at a reasonable price in relation to current and
expected market conditions for a sufficient term to justify its restart costs,
which could be significant depending on the number of lines restarted and the
length of time between the shutdown and restart. Given recent primary aluminum
prices and the forward price of power in the Northwest, it is unlikely that
Kaiser would operate more than a portion of its Northwest smelting capacity in
the near future. Were Kaiser to restart all or a portion of its Northwest
smelting capacity, it would take between three to six months to reach the full
operating rate for such operations, depending upon the number of lines
restarted. Even after achieving the full operating rate, operating only a
portion of the Northwest capacity would result in production/cost inefficiencies
such that operating results would, at best, be breakeven to modestly negative at
long-term primary aluminum prices. However, operating at such a reduced rate
could, depending on prevailing economics, result in improved cash flows as
opposed to remaining curtailed and incurring Kaiser's fixed and continuing labor
and other costs. This is because Kaiser is contractually liable for certain
severance, supplemental unemployment benefits and early retirement benefits for
laid-off workers under Kaiser's contract with the USWA during periods of
curtailment. As of December 31, 2001, all such contractual compensation costs
have been accrued for all USWA workers in excess of those expected to be
required to run the Northwest smelters at a rate up to the above stated 40%
smelter operating rate. These costs are expected to be incurred periodically
through September 2002. Costs associated with the USWA workers that Kaiser
estimates would be required to operate the smelters at an operating rate of up
to 40% ($12.7 million in 2001) have been accrued through early 2003, as Kaiser
does not expect to restart the Northwest smelters prior to that date. If such
workers are not recalled prior to the end of the first quarter of 2003, Kaiser
could become liable for additional early retirement costs. Such costs could be
significant and could adversely impact Kaiser's consolidated operating results
and liquidity. The present value of such costs could be in the $50.0 million to
$60.0 million range. However, such costs would likely be paid out over an
extended period.

5.    SIGNIFICANT ACQUISITIONS AND DISPOSITIONS

      Kaiser's Acquisitions and Disposition
      In September 2001, Kaiser sold an approximate 8.3% interest in Queensland
Alumina Limited ("QAL") and recorded a pre-tax gain of approximately $163.6
million. As a result of the transaction, Kaiser now owns a 20% interest in QAL.
The total value of the transaction was approximately $189.0 million, consisting
of a cash payment of approximately $159.0 million plus the purchaser's
assumption of approximately $30.0 million of off-balance sheet QAL indebtedness
guaranteed by Kaiser prior to the sale.

      Kaiser's share of QAL's production for the first eight months of 2001 and
for the years ended December 31, 2000 and 1999 was approximately 668,000 tons,
1,064,000 tons and 1,033,000 tons, respectively. Had the sale of the QAL
interest been effective as of the beginning of 1999, Kaiser's share of QAL's
production for 2001, 2000 and 1999 would have been reduced by approximately
196,000 tons, 312,000 tons and 304,000 tons, respectively. Historically, Kaiser
has sold about half of its share of QAL's production to third parties and has
used the remainder to supply its Northwest smelters, which are temporarily
curtailed (see Note 4). The reduction in Kaiser's alumina supply associated with
this transaction is expected to be substantially offset by the expected return
of its Gramercy alumina refinery to full operations during the first quarter of
2002 at a higher capacity and by planned increases during 2003 in capacity at
its Alpart alumina refinery in Jamaica. The QAL transaction is not expected to
have an adverse impact on Kaiser's ability to satisfy existing third-party
alumina customer contracts.

      In June 2001, KACC wrote-off its investment of $2.8 million in
MetalSpectrum, LLC, a start-up, e-commerce entity in which Kaiser was a founding
partner (in 2000). MetalSpectrum ceased operations during the second quarter of
2001.

      During 2001, as part of its ongoing initiatives to generate cash benefits,
Kaiser sold certain non-operating real estate for net proceeds totaling
approximately $7.9 million, resulting in a pre-tax gain of $6.9 million
(included in investment, interest and other income (expense), net; see Note 2).

      During 2000, Kaiser sold (i) its Pleasanton, California, office complex,
because the complex had become surplus to Kaiser's needs, for net proceeds of
approximately $51.6 million, which resulted in a net pre-tax gain of $22.0
million (included in investment, interest and other income (expense), net; see
Note 2); (ii) certain non-operating properties, in the ordinary course of
business, for total proceeds of approximately $12.0 million; and (iii) the
Micromill assets and technology for a nominal payment at closing and possible
future payments based on subsequent performance and profitability of the
Micromill technology. The sale of the non-operating properties and Micromill
assets did not have a material impact on Kaiser's 2000 operating results.

      In May 2000, Kaiser acquired the assets of a drawn tube aluminum
fabricating operation in Chandler, Arizona. Total consideration for the
acquisition was $16.1 million ($1.1 million of property, plant and equipment,
$2.8 million of accounts receivables, inventory and prepaid expenses and $12.2
million of goodwill).

      In 1999, Kaiser sold its 50% interest in AKW L.P. ("AKW") to its partner
for $70.4 million, which resulted in Kaiser recognizing a net pre-tax gain of
$50.5 million (included in other income (expense)). Kaiser's equity in earnings
of AKW was $2.5 million for the year ended December 31, 1999.

      Headwaters Transactions
      In March 1999, the United States and California acquired approximately
5,600 acres of timberlands containing a significant amount of virgin old growth
timber, from Salmon Creek and Pacific Lumber (the "HEADWATERS TIMBERLANDS").
Salmon Creek received $299.9 million for its 4,900 acres, and for its 700 acres
Pacific Lumber received the 7,700 acre Elk River Timberlands, which Pacific
Lumber contributed to Scotia LLC in June 1999. See Note 16 below for a
discussion of additional arrangements entered into at the time.

      As a result of the disposition of the Headwaters Timberlands, the Company
recognized a pre-tax gain of $239.8 million ($142.1 million net of deferred
taxes or $18.17 per share) in 1999. This amount represents the gain attributable
to the portion of the Headwaters Timberlands for which the Company received
$299.9 million in cash. With respect to the remaining portion of the Headwaters
Timberlands for which the Company received the Elk River Timberlands, no gain
has been recognized as this represented an exchange of substantially similar
productive assets. These timberlands are reflected in the Company's financial
statements at an amount which represents the Company's historical cost for the
timberlands which were transferred to the United States.

      Scotia Pacific Company LLC (a wholly owned subsidiary of Pacific Lumber,
"SCOTIA LLC") and Pacific Lumber also entered into agreements with California
for the sale of two timber properties known as the Owl Creek grove and the
Grizzly Creek grove. On December 29, 2000, Scotia LLC sold the Owl Creek grove
to California for $67.0 million, resulting in a pre-tax gain of $60.0 million.
On November 15, 2001, Pacific Lumber sold the Grizzly Creek grove to California
for $19.8 million, resulting in a pre-tax gain of $16.7 million.

      LakePointe Plaza
      In June 2001, Lakepointe Assets Holdings LLC, a limited liability company,
and its subsidiaries, all of which are wholly owned subsidiaries of Salmon Creek
("LAKEPOINTE ASSETS") purchased Lake Pointe Plaza, an office complex located in
Sugar Land, Texas, for a purchase price of $131.3 million. The transaction was
financed with proceeds of $117.3 million, net of $5.2 million in deferred
financing costs, from the "LAKEPOINTE NOTES" ($122.5 million principal amount
with a final maturity date of June 8, 2021, and an interest rate of 7.56%), and
with a cash payment of $14.0 million. Lakepointe Assets acquired the property
subject to two leases to existing tenants while simultaneously leasing a
majority of the premises, representing all of the remaining space, to an
affiliate of the seller. The office complex is fully leased for a period of 20
years under these three leases. Lakepointe Assets is accounting for these leases
as operating leases. The Lakepointe Notes are secured by the leases, Lake Pointe
Plaza and a $60.0 million residual value insurance contract.

      Sale of Water Utility
      On October 11, 2000, Chaparral City Water Company, a water utility company
in Arizona and a wholly owned subsidiary of MCO Properties Inc., a real estate
subsidiary of the Company, was sold for $22.4 million resulting in a pre- tax
gain of approximately $11.3 million.

6.    CASH, MARKETABLE SECURITIES AND OTHER INVESTMENTS

      Cash equivalents consist of highly liquid money market instruments with
original maturities of three months or less. As of December 31, 2001 and 2000,
the carrying amounts approximated fair value.

      Marketable securities consist primarily of investments in debt securities.
The Company determines the appropriate classification of its investments in debt
securities at the time of purchase and reevaluates such determinations at each
balance sheet date. Debt securities are classified as "held-to-maturity" when
the Company has the positive intent and ability to hold the securities to
maturity. Debt securities which the Company does not have the intent or ability
to hold to maturity are classified as "available-for-sale." "Held-to-maturity"
securities are stated at amortized cost. Debt securities classified as
"held-to-maturity" as of December 31, 2001 and 2000, totaled $11.9 million and
$18.9 million, respectively, and had a fair market value of $11.9 million and
$18.9 million, respectively. "Available-for-sale" securities are carried at fair
market value, with the unrealized gains and losses included in other
comprehensive income and reported in stockholders' equity. The fair value of
substantially all securities is determined by quoted market prices. Marketable
securities which are considered "trading" securities consist of long and short
positions in corporate common stocks and option contracts and are carried at
fair value. The cost of the securities sold is determined using the first-in,
first-out method. Included in investment, interest and other income (expense),
net, for each of the three years in the period ended December 31, 2001 were:
2001 - net unrealized gains of $9.2 million and net realized losses of $1.9
million; 2000 - net unrealized gains of $1.0 million and net realized gains of
$24.5 million; and 1999 - net unrealized losses of $1.4 million and net realized
gains of $18.8 million.

      Cash, marketable securities and other investments include the following
amounts which are restricted (in millions):


                                                                                               DECEMBER 31,
                                                                                       ----------------------------
                                                                                           2001           2000
                                                                                       ------------- --------------
Current assets:
   Cash and cash equivalents:
      Amounts held as security for short positions in marketable securities..........  $          -  $        30.9
      Other restricted cash and cash equivalents.....................................          42.8           36.7
                                                                                       ------------- --------------
                                                                                               42.8           67.6
                                                                                       ------------- --------------
   Marketable securities, restricted:
      Amounts held in SAR Account....................................................          17.1           16.3
                                                                                       ------------- --------------

Long-term restricted cash, marketable securities and other investments:
   Amounts held in SAR Account.......................................................         137.8          144.4
   Other amounts restricted under the Timber Notes Indenture.........................           2.8            2.9
   Other long-term restricted cash...................................................          10.9           11.7
   Less: Amounts attributable to Timber Notes held in SAR Account....................         (53.0)         (52.7)
                                                                                       ------------- --------------
                                                                                               98.5          106.3
                                                                                       ------------- --------------

Total restricted cash and marketable securities......................................  $      158.4  $       190.2
                                                                                       ============= ==============

      Amounts in the Scheduled Amortization Reserve Account (the "SAR ACCOUNT")
are being held by the trustee under the indenture (the "TIMBER NOTES INDENTURE")
to support principal payments on Scotia LLC's Class A-1, Class A-2 and Class A-3
Timber Collateralized Notes due 2028 (the "TIMBER NOTES"). See Note 11 for
further discussion on the SAR Account. The current portion of the SAR Account is
determined based on the liquidity needs of Scotia LLC which corresponds directly
with the current portion of Scheduled Amortization.

      On March 5, 2002, Scotia LLC notified the trustee for the Timber Notes
that it had met all of the requirements of the SAR Reduction Date, as defined in
the Indenture. Accordingly, on March 20, 2002, Scotia LLC released $29.4 million
from the SAR Account and distributed this amount to Pacific Lumber.

      Cash, marketable securities and other investments include a limited
partnership interest in a partnership investing in equity securities (the
"EQUITY FUND PARTNERSHIP"), which invests in a diversified portfolio of common
stocks and other equity securities whose issuers are involved in merger, tender
offer, spin-off or recapitalization transactions. This investment is not
consolidated, but is accounted for under the equity method. The following table
shows the Company's investment in the Equity Fund Partnership, including
restricted amounts held in the SAR Account, and the ownership interest (dollars
in millions).


                                                                                                 December 31,
                                                                                        ------------------------------
                                                                                            2001             2000
                                                                                        -------------   --------------
Investment in Equity Fund Partnership:
   Restricted........................................................................   $       10.6    $        10.1
   Unrestricted......................................................................          130.6               -
                                                                                        -------------   --------------
                                                                                        $      141.2    $        10.1
                                                                                        =============   ==============

Percentage of ownership held.........................................................           41.0%            10.8%
                                                                                        =============   ==============


      The Equity Fund Partnership commenced operations on June 1, 2000. The
following tables contain summarized financial information of the Equity Fund
Partnership (in millions).


                                                                                                   DECEMBER 31,
                                                                                               --------------------
                                                                                                 2001       2000
                                                                                               ---------  ---------

Investments, at market value.................................................................. $  331.7   $   93.5
Due from brokers..............................................................................    273.7       72.8
Other assets..................................................................................     24.7        5.2
                                                                                               ---------  ---------
   Total assets............................................................................... $  630.1   $  171.5
                                                                                               =========  =========

Investments sold, not yet purchased, at market value.......................................... $  283.6   $   76.5
Other liabilities.............................................................................      7.8        0.9
Partners' capital.............................................................................    338.7       94.1
                                                                                               ---------  ---------
   Total liabilities and partners' capital.................................................... $  630.1   $   171.5
                                                                                               =========  =========



                                                                                                      PERIOD FROM
                                                                                      YEAR-ENDED    JUNE 1, 2000 TO
                                                                                     DECEMBER 31,    DECEMBER 31,
                                                                                         2001            2000
                                                                                    --------------  ---------------

Investment income.................................................................  $        13.2   $          1.9
Operating expenses................................................................          (11.8)            (1.4)
Net realized and unrealized gains  on investments.................................           14.3              4.9
                                                                                    --------------  ---------------
   Net increase in partners' capital resulting from operations....................  $        15.7   $          5.4
                                                                                    ==============  ===============

      As of December 31, 2001, long-term restricted cash, marketable securities
and other investments also included $10.0 million related to an investment in a
limited partnership which invests in, among other things, debt and equity
securities associated with developed and emerging markets.

7.    INVENTORIES

   Inventories are stated at the lower of cost or market. Cost for the aluminum
and forest products operations inventories is primarily determined using the
last-in, first-out ("LIFO") method not in excess of market value. Replacement
cost is not in excess of LIFO cost. Other inventories of the aluminum
operations, principally operating supplies and repair and maintenance parts, are
stated at the lower of average cost or market. Inventory costs consist of
material, labor and manufacturing overhead, including depreciation and
depletion.

      Inventories consist of the following (in millions):


                                                                                                   DECEMBER 31,
                                                                                               --------------------
                                                                                                 2001       2000
                                                                                               ---------  ---------
Aluminum operations:
   Finished fabricated products............................................................... $   30.4   $   54.6
   Primary aluminum and work in process.......................................................    108.3      126.9
   Bauxite and alumina........................................................................     77.7       88.6
   Operating supplies and repair and maintenance parts........................................     96.9      126.1
                                                                                               ---------  ---------
                                                                                                  313.3      396.2
                                                                                               ---------  ---------
Forest products operations:
   Lumber.....................................................................................     29.3       34.0
   Logs.......................................................................................     22.1       21.1
                                                                                               ---------  ---------
                                                                                                   51.4       55.1
                                                                                               ---------  ---------
                                                                                               $  364.7   $  451.3
                                                                                               =========  =========

      Kaiser's inventories at December 31, 2001, have been reduced by (i) a $5.6
million charge (in cost of sales and operations - aluminum) to write-down
certain excess operating supplies and repair and maintenance parts that will be
sold, rather than used in production, and (ii) $8.2 million of LIFO inventory
charges (in cost of sales and operations - aluminum) as reductions of inventory
volumes in inventory layers with higher costs than current market prices. See
Note 2.

      Kaiser's inventories at December 31, 2000 were reduced by LIFO inventory
charges totaling $24.1 million. These charges result primarily from the
Washington smelters' curtailment ($4.5 million), Kaiser's exit from the can body
stock product line ($11.1 million) and the delayed restart of the Gramercy
facility ($7.0 million). See Note 2.

      Forest products' inventories at December 31, 2001, have been reduced by a
$1.6 million charge (in cost of sales and operations - Forest Products) due to a
decline in current market prices below the cost of such inventory.

8.    PROPERTY, PLANT AND EQUIPMENT

      Property, plant and equipment, including capitalized interest, is stated
at cost, net of accumulated depreciation. Depreciation is computed principally
utilizing the straight-line method at rates based upon the estimated useful
lives of the various classes of assets. The carrying value of property, plant
and equipment is assessed when events and circumstances indicate that an
impairment might exist. The existence of an impairment is determined by
comparing the net carrying value of the asset to its estimated undiscounted
future cash flows. If an impairment is present, the asset is reported at the
lower of carrying value or fair value.

      The major classes of property, plant and equipment are as follows (dollar
amounts in millions):


                                                                                                  DECEMBER 31,
                                                                         ESTIMATED USEFUL   -----------------------
                                                                               LIVES           2001        2000
                                                                         -----------------  ----------  -----------
Land and improvements...................................................     5 - 30 years   $   228.8   $    207.9
Buildings...............................................................     5 - 45 years       395.8        278.4
Machinery and equipment.................................................     3 - 22 years     1,918.6      1,744.1
Construction in progress................................................                         51.0        133.9
                                                                                            ----------  -----------
                                                                                              2,594.2      2,364.3
Less:  accumulated depreciation.........................................                     (1,094.7)    (1,033.0)
                                                                                            ----------  -----------
                                                                                            $ 1,499.5   $  1,331.3
                                                                                            ==========  ===========

      Depreciation expense for the years ended December 31, 2001, 2000 and 1999
was $103.9 million, $88.8 million, and $101.5 million, respectively.

      Kaiser concluded that the profitability of its Trentwood facility can be
enhanced by further focusing resources on its core, heat-treat business and by
exiting lid and tab stock product lines used in the beverage container market
and brazing sheet for the automotive market. As a result of this decision,
Kaiser plans to sell or idle several pieces of equipment, resulting in an
impairment charge of approximately $17.7 million at December 31, 2001 (which
amount was reflected in impairment of assets in the Consolidated Statement of
Operations). Additional charges are likely as Kaiser works through all of the
operational impacts of this decision to exit the lid, tab and brazing sheet
product lines.

      During 2000, Kaiser evaluated the recoverability of the approximate $200.0
million carrying value of its Washington smelters as a result of the change in
the economic environment of the Pacific Northwest associated with the reduced
power availability and higher power costs for Kaiser's Washington smelters under
the terms of the new contract with the BPA starting in October 2001 (see Note
4). Kaiser determined that the expected future undiscounted cash flows of the
Washington smelters were below their carrying value. Accordingly, during 2000,
Kaiser adjusted the carrying value of its Washington smelting assets to their
estimated fair value, which resulted in a non-cash impairment charge of
approximately $33.0 million (see Note 2). The estimated fair value was based on
anticipated future cash flows discounted at a rate commensurate with the risk
involved.

      In 1999, based on negotiations with third parties, Kaiser concluded to
sell the Micromill assets and technology for less than the then existing
carrying value. Accordingly, the carrying value of the Micromill assets were
reduced by recording an impairment charge of $19.1 million in 1999 (see Note 2).

      As discussed in Note 2, the Company recorded $2.2 million for asset
impairments related to forest products operations in 2001.

9.    INVESTMENTS IN AND ADVANCES TO UNCONSOLIDATED AFFILIATES

      Summary combined financial information is provided below for
unconsolidated aluminum investments, most of which supply and process raw
materials. These investees include QAL (20.0% owned), Anglesey Aluminium Limited
("ANGLESEY") (49.0% owned) and Kaiser Jamaica Bauxite Company (49.0% owned).
Kaiser's equity in earnings (loss) before income taxes of such operations is
treated as a reduction (increase) in cost of sales and operations. At December
31, 2001 and 2000, Kaiser's net receivables from these affiliates were not
material. In addition, the1999 summary income statement information includes
results for AKW which was sold on April 1, 1999 (see Note 5). Kaiser's equity in
earnings of AKW was $2.5 million for the year ended December 31, 1999.


                                                                                                 DECEMBER 31,
                                                                                            -----------------------
                                                                                               2001        2000
                                                                                            ----------  -----------
                                                                                            (In millions of dollars)
Current assets............................................................................  $   362.4   $    350.1
Long-term assets (primarily property, plant and equipment, net)...........................      345.7        327.3
                                                                                            ----------  -----------
   Total assets...........................................................................  $   708.1   $    677.4
                                                                                            ==========  ===========

Current liabilities.......................................................................  $   237.6   $    144.1
Long-term liabilities (primarily long-term debt)..........................................      271.2        331.4
Stockholders' equity......................................................................      199.3        201.9
                                                                                            ----------  -----------
   Total liabilities and stockholders' equity.............................................  $   708.1   $    677.4
                                                                                            ==========  ===========


                                                                                     YEARS ENDED DECEMBER 31,
                                                                               ------------------------------------
                                                                                  2001         2000        1999
                                                                               -----------  ----------  -----------
                                                                                     (In millions of dollars)
Net sales..................................................................... $    633.5   $   602.9   $    594.9
Costs and expenses............................................................     (621.5)     (617.1)      (582.9)
Credit (provision) for income taxes...........................................       (3.9)       (4.5)         0.8
                                                                               -----------  ----------  -----------
Net income (loss)............................................................. $      8.1   $   (18.7)  $     12.8
                                                                               ===========  ==========  ===========

Kaiser's equity in earnings (loss)............................................ $      1.7   $    (4.8)  $      4.9
                                                                               ===========  ==========  ===========

Dividends received............................................................ $      2.8   $     8.3   $        -
                                                                               ===========  ==========  ===========

      Kaiser's equity in earnings differs from the summary net income (loss) due
to varying percentage ownerships in the entities and equity method accounting
adjustments. Prior to December 31, 2000, Kaiser's investment in its
unconsolidated affiliates exceeded its equity in their net assets and such
excess was being amortized to depreciation, depletion and amortization. At
December 31, 2000, the excess investment had been fully amortized. Such
amortization was approximately $10.0 million for each of the years ended
December 31, 2000 and 1999.

      Kaiser and its affiliates have interrelated operations. Kaiser provides
some of its affiliates with services such as management and engineering.
Significant activities with affiliates include the acquisition and processing of
bauxite, alumina, and primary aluminum. Purchases from these affiliates were
$266.0 million, $235.7 million, and $223.7 million in the years ended December
31, 2001, 2000, and 1999, respectively.

      Other Investees
      The Company and Westbrook Firerock LLC each holds a 50% interest in a
joint venture which develops and manages a real estate project in Arizona
("FIREROCK, LLC"). At December 31, 2001, the joint venture had assets of $37.6
million, liabilities of $21.0 million and equity of $16.6 million. At December
31, 2000, the joint venture had assets of $41.7 million, liabilities of $25.3
million and equity of $16.4 million. For the years ended December 31, 2001, 2000
and 1999, the joint venture had income of $10.1 million, $9.7 million, and $3.7
million, respectively.

      The Company and SunCor Development Company each hold a 50% interest in a
joint venture which develops and manages a real estate project in Arizona
("SUNRIDGE CANYON L.L.C."). At December 31, 2001, the joint venture had assets
of $10.5 million, liabilities of $8.3 million and equity of $2.2 million. At
December 31, 2000, the joint venture had assets of $11.3 million, liabilities of
$8.5 million and equity of $2.8 million. For the years ended December 31, 2001,
2000 and 1999, the joint venture had income (loss) of $(0.2) million, $1.3
million and $4.8 million, respectively.


10.   SHORT-TERM BORROWINGS

      During 2001 and 2000, the Company had average short-term borrowings
outstanding of $10.2 million and $14.7 million, respectively, under the debt
instruments described below. The weighted average interest rate during 2001 and
2000 was 7.0% and 8.4%, respectively.

      MAXXAM Loan Agreement (the "CUSTODIAL TRUST AGREEMENT")
      The Company repaid $7.7 million of borrowings outstanding under the
Custodial Trust Agreement on October 22, 2001, the maturity date. The Company
did not renew this short-term borrowing facility.

      Pacific Lumber Credit Agreement
      The "PACIFIC LUMBER CREDIT AGREEMENT" was renewed on August 14, 2001. The
new facility provides for a $50.0 million two-year revolving line of credit as
compared to a $60.0 million line of credit under the expired facility. On each
anniversary date (subject to the consent of the lender), the Pacific Lumber
Credit Agreement may be extended by one year. Borrowings are secured by all of
Pacific Lumber's domestic accounts receivable and inventory. As of December 31,
2001, borrowings of $17.7 million and letters of credit of $11.5 million were
outstanding. Unused availability was limited to $12.2 million at December 31,
2001.

      Scotia LLC Line of Credit Agreement
      Pursuant to certain liquidity requirements under the Timber Notes
Indenture, Scotia LLC has entered into an agreement (the "SCOTIA LLC LINE OF
CREDIT") with a group of banks pursuant to which Scotia LLC may borrow to pay
interest on the Timber Notes. The maximum amount Scotia LLC may borrow is equal
to one year's interest on the aggregate outstanding principal balance of the
Timber Notes (the "REQUIRED LIQUIDITY AMOUNT"). At December 31, 2001, the
Required Liquidity Amount was $60.9 million. On June 1, 2001, the Scotia LLC
Line of Credit was extended for an additional year to July 12, 2002. Annually,
Scotia LLC will request that the banks extend the Scotia LLC Line of Credit for
a period of not less than 364 days. If not extended, Scotia LLC may draw upon
the full amount available. The amount drawn would be repayable in 12 semiannual
installments on each note payment date (after the payment of certain other
items, including the Aggregate Minimum Principal Amortization Amount, as
defined, then due), commencing approximately two and one-half years following
the date of the draw. Borrowings under the Scotia LLC Line of Credit generally
bear interest at the Base Rate (as defined in the agreement) plus 0.25% or at a
one month or six month LIBOR rate plus 1% at any time the borrowings have not
been continually outstanding for more than six months. As of December 31, 2001,
Scotia LLC had no borrowings outstanding under the Scotia LLC Line of Credit.

11.     LONG-TERM DEBT

      Long-term debt (before considering any impacts of the Cases as discussed
below) consists of the following (in millions):

                                                                                                 DECEMBER 31,
                                                                                            -----------------------
                                                                                               2001        2000
                                                                                            ----------  -----------
KACC Credit Agreement.....................................................................  $       -   $     30.4
9 7/8% KACC Senior Notes due February 15, 2002, net of discount...........................      172.8        224.8
10 7/8% KACC Senior Notes due October 15, 2006, including premium.........................      225.4        225.5
12 3/4% KACC Senior Subordinated Notes due February 1, 2003...............................      400.0        400.0
Alpart CARIFA Loans.......................................................................       22.0         56.0
Other aluminum operations debt............................................................       54.1         52.7
12% MGHI Senior Secured Notes due August 1, 2003..........................................       88.2        118.8
6.55% Scotia LLC Class A-1 Timber Collateralized Notes due July 20, 2028..................      120.3        136.7
7.11% Scotia LLC Class A-2 Timber Collateralized Notes due July 20, 2028..................      243.2        243.2
7.71% Scotia LLC Class A-3 Timber Collateralized Notes due July 20, 2028..................      463.3        463.3
7.56% Lakepointe Notes (see Note 5).......................................................      121.7            -
Other notes and contracts, primarily secured by receivables, buildings,
     real estate and equipment                                                                   52.4         41.5
                                                                                            ----------  -----------
                                                                                              1,963.4      1,992.9
      Less: current maturities............................................................     (198.9)       (48.0)
           Timber Notes held in SAR Account...............................................      (57.7)       (59.9)
                                                                                            ----------  -----------
                                                                                            $ 1,706.8   $  1,885.0
                                                                                            ==========  ===========

      The amount attributable to the Timber Notes held in the SAR Account of
$53.0 million reflected in Note 6 above represents $57.7 million of principal
amount of Timber Notes, net of $4.7 million of unamortized discount.

      At December 31, 2001, the estimated fair value of the Company's current
and long-term debt, excluding amounts attributable to Kaiser, was $1,009.0
million. Given the fact that the fair value of substantially all of Kaiser's
outstanding indebtedness will be determined as part of the plan of
reorganization, it is impracticable and inappropriate to estimate the fair value
of these financial instruments at December 31, 2001. At December 31, 2000, the
estimated fair value of debt, including current maturities and Kaiser
indebtedness, was $1,636.8 million. The estimated fair value of debt is
determined based on the quoted market prices for the publicly traded issues and
on the current rates offered for borrowings similar to the other debt. Some of
the Company's publicly traded debt issues are thinly traded financial
instruments; accordingly, their market prices at any balance sheet date may not
be representative of the prices which would be derived from a more active
market.

      DIP Facility
      On February 12, 2002, Kaiser entered into a post-petition credit agreement
with a group of lenders for debtor-in-possession financing (the "DIP FACILITY")
which provides for a secured, revolving line of credit through the earlier of
February 12, 2004, the effective date of a plan of reorganization or voluntary
termination by Kaiser. The DIP Facility contains substantially similar terms and
conditions to those that were included in the KACC Credit Agreement (defined
below). Kaiser is able to borrow under the DIP Facility by means of revolving
credit advances and letters of credit (up to $125.0 million) in an aggregate
amount equal to the lesser of $300.0 million or a borrowing base relating to
eligible accounts receivable, eligible inventory and eligible fixed assets
reduced by certain reserves, as defined in the DIP Facility agreement. The DIP
Facility is guaranteed by Kaiser, the Debtor subsidiaries and two non-Debtor
wholly owned subsidiaries, Kaiser Jamaica Corporation and Alpart Jamaica, Inc.
Interest on any outstanding balances will bear a spread over either a base rate
or LIBOR, at Kaiser's option. The Court signed a final order approving the DIP
Facility on March 19, 2002. At March 31, 2002, there were no outstanding
borrowings under the revolving credit facility and there were outstanding
letters of credit of approximately $54.1 million. As of March 31, 2002, $121.0
million (of which $70.9 million could be used for letters of credit) was
available to Kaiser under the DIP Facility. Kaiser expects that the borrowing
base amount will increase by approximately $50.0 million once certain appraisal
information is provided to the lenders.

      1994 KACC Credit Agreement (as amended)
      Prior to the February 12, 2002 Filing Date, KACC had a credit agreement,
as amended (the "KACC CREDIT AGREEMENT") which provided a secured, revolving
line of credit. The KACC Credit Agreement was secured by, among other things,
(i) mortgages on Kaiser's major domestic plants (excluding Kaiser's Gramercy
alumina plant); (ii) subject to certain exceptions, liens on the accounts
receivable, inventory, equipment, domestic patents and trademarks, and
substantially all other personal property of Kaiser and certain of its
subsidiaries; (iii) a pledge of all the stock of KACC owned by Kaiser; and (iv)
pledges of all of the stock of a number of KACC's wholly owned domestic
subsidiaries, pledges of a portion of the stock of certain foreign subsidiaries,
and pledges of a portion of the stock of certain partially owned foreign
affiliates. The KACC Credit Agreement terminated on the Filing Date and was
replaced by the DIP Facility discussed above. During the last six months of
2001, there were no borrowings under the KACC Credit Agreement. During the first
six months of 2001, month-end borrowings under the KACC Credit Agreement were as
high as approximately $94.0 million, which occurred in February 2001, primarily
as a result of costs incurred and capital spending related to the Gramercy
rebuild, net of insurance reimbursements. The average amount of borrowings
outstanding under the KACC Credit Agreement during 2001 was approximately $11.8
million. The average interest rate on loans outstanding under the KACC Credit
Agreement during 2001 was approximately 10.0% per annum. As of the Filing Date,
outstanding letters of credit were approximately $43.3 million, and there were
no borrowings outstanding under the KACC Credit Agreement.

      KACC 9 7/8% Senior Notes due February 2002 (the "KACC 9 7/8% SENIOR
      NOTES"), KACC 10 7/8% Senior Notes due 2006 (the "KACC 10 7/8% SENIOR
      NOTES") and KACC 12 3/4% Senior Subordinated Notes due February 2003 (the
      "KACC SENIOR SUBORDINATED NOTES") (collectively, the "KACC NOTES")
      The obligations of Kaiser with respect to the KACC Notes are guaranteed,
jointly and severally, by certain subsidiaries of Kaiser. Prior to concluding
that, as a result of the events outlined in Note 1, Kaiser should file the
Cases, Kaiser had purchased $52.2 million of the KACC 9 7/8% Senior Notes. The
net gain from the purchase of the notes was less than $1.1 million.

      Alpart CARIFA Loans
      In December 1991, Alumina Partners of Jamaica ("ALPART") entered into a
loan agreement with the Caribbean Basin Projects Financing Authority ("CARIFA").
As of December 31, 2001, Alpart's obligations under the loan agreement were
secured by two letters of credit aggregating $23.5 million. Kaiser was a party
to one of the two letters of credit in the amount of $15.3 million in respect of
its 65% ownership interest in Alpart. Alpart has also agreed to indemnify
bondholders of CARIFA for certain tax payments that could result from events, as
defined, that adversely affect the tax treatment of the interest income on the
bonds.

      During the first quarter of 2001, Alpart redeemed $34.0 million principal
amount of the CARIFA loans. The redemption had a modest beneficial effect on the
unused availability remaining under the KACC Credit Agreement as the additional
KACC Credit Agreement borrowings of $22.1 million required for Kaiser's share of
the redemption were more than offset by a reduction in the amount of letters of
credit outstanding that supported the loan.

      7.6% Solid Waste Disposal Revenue Bonds
      The sold waste disposal revenue bonds are secured by a first mortgage on
certain machinery at KACC's Mead smelter.

      Aluminum Debt Covenants and Restrictions
      The DIP Facility requires Kaiser to comply with certain financial
covenants and places restrictions on Kaiser's ability to, among other things,
incur debt and liens, make investments, pay dividends, undertake transactions
with affiliates, make capital expenditures, and enter into unrelated lines of
business. The DIP Facility is secured by, among other things, (i) mortgages on
Kaiser's major domestic plants; (ii) subject to certain exceptions, liens on the
accounts receivable, inventory, equipment, domestic patents and trademarks, and
substantially all other personal property of Kaiser and certain of its
subsidiaries; (iii) a pledge of all the stock of KACC owned by Kaiser; and (iv)
pledges of all of the stock of a number of Kaiser's wholly owned domestic
subsidiaries, pledges of a portion of the stock of certain foreign subsidiaries,
and pledges of a portion of the stock of certain partially owned foreign
affiliates.

      The indentures governing the KACC Notes (collectively, the "KACC
INDENTURES") restrict, among other things, Kaiser's ability to incur debt,
undertake transactions with affiliates, and pay dividends. Further, the KACC
Indentures provide that Kaiser must offer to purchase the KACC Notes upon the
occurrence of a Change of Control (as defined therein).

      12% MGHI Senior Secured Notes due 2003 (the "MGHI NOTES")
      The MGHI Notes due August 1, 2003 are guaranteed on a senior, unsecured
basis by the Company. As of December 31, 2001, the MGHI Notes are also secured
by a pledge of 23,443,953 shares of the Kaiser common stock owned by MGHI, the
common stock of MGI and the Intercompany Note (defined below). Interest on the
MGHI Notes is payable semi-annually. During 2001, MGHI purchased $30.6 million
of the MGHI Notes resulting in an extraordinary gain of $3.6 million. During
January and February 2002, MGHI purchased $16.9 million of the MGHI Notes
resulting in an extraordinary gain of $1.9 million.

      The net proceeds from the offering of the MGHI Notes after expenses were
approximately $125.0 million, all of which was loaned to the Company pursuant to
an intercompany note (the "INTERCOMPANY NOTE"). The Intercompany Note bears
interest at the rate of 11% per annum (payable semi-annually on the interest
payment dates applicable to the MGHI Notes) and matures on August 1, 2003. The
Company is entitled to defer the payment of interest on the Intercompany Note on
any interest payment date to the extent that MGHI has sufficient available funds
to satisfy its obligations on the MGHI Notes on such date. Any such deferred
interest will be added to the principal amount of the Intercompany Note and will
be payable at maturity. As of December 31, 2001, $58.1 million of interest had
been deferred and added to principal. An additional $10.1 million of interest
was deferred and added to principal on February 1, 2002. The Company expects
that it will pay the amount of the Intercompany Note necessary to retire the
MGHI Notes.

      Scotia LLC Timber Notes
      Scotia LLC issued $867.2 million aggregate principal amount of Timber
Notes on July 20, 1998. The Timber Notes and the Scotia LLC Line of Credit are
secured by a lien on (i) Scotia LLC's timber, timberlands and timber rights and
(ii) substantially all of Scotia LLC's other property. The Timber Notes
Indenture permits Scotia LLC to have outstanding up to $75.0 million of
non-recourse indebtedness to acquire additional timberlands and to issue
additional timber notes provided certain conditions are met (including repayment
or redemption of the remaining $120.3 million of Class A-1 Timber Notes).

      The Timber Notes were structured to link, to the extent of cash available,
the deemed depletion of Scotia LLC's timber (through the harvest and sale of
logs) to the required amortization of the Timber Notes. The required amount of
amortization on any Timber Notes payment date is determined by various
mathematical formulas set forth in the Timber Notes Indenture. The minimum
amount of principal which Scotia LLC must pay (on a cumulative basis and subject
to available cash) through any Timber Notes payment date is referred to as
Minimum Principal Amortization. If the Timber Notes were amortized in accordance
with Minimum Principal Amortization, the final installment of principal would be
paid on July 20, 2028. The minimum amount of principal which Scotia LLC must pay
(on a cumulative basis) through any Timber Notes payment date in order to avoid
payment of prepayment or deficiency premiums is referred to as Scheduled
Amortization. If all payments of principal are made in accordance with Scheduled
Amortization, the payment date on which Scotia LLC will pay the final
installment of principal is January 20, 2014. Such final installment would
include a single bullet principal payment of $463.3 million related to the
Class A-3 Timber Notes.

      In connection with the sale of the Headwaters Timberlands, Salmon Creek
received proceeds of $299.9 million in cash. See Note 5. In November 1999,
$169.0 million of funds from the sale of the Headwaters Timberlands were
contributed to Scotia LLC and set aside in the SAR Account. Amounts in the SAR
Account are part of the collateral securing the Timber Notes and will be used to
make principal payments to the extent that other available amounts are
insufficient to pay Scheduled Amortization on the Class A-1 and Class A-2 Timber
Notes. In addition, during the six years beginning January 20, 2014, amounts in
the SAR Account will be used to amortize the Class A-3 Timber Notes as set forth
in the Timber Notes Indenture, as amended. Funds may from time to time be
released to Scotia LLC from the SAR Account if the amount in the account exceeds
the then Required Scheduled Amortization Reserve Balance (as defined in the
Timber Notes Indenture). If the balance in the SAR Account falls below the
Required Scheduled Amortization Reserve Balance, up to 50% of any Remaining
Funds (funds that could otherwise be released to Scotia LLC free of the lien
securing the Timber Notes) is required to be used on each monthly deposit date
to replenish the SAR Account. The amount attributable to Timber Notes held in
the SAR Account of $53.0 million reflected in Note 6 represents $57.7 million
principal amount of reacquired Timber Notes.

      Principal and interest are payable semi-annually on January 20 and July
20. During the year ended December 31, 2001, Scotia LLC used $67.3 million set
aside in the note payment account to pay the $57.4 million of interest due as
well as $9.9 million of principal. Scotia LLC repaid an additional $4.3 million
of principal on the Timber Notes using funds held in the SAR Account, resulting
in total principal payments of $14.2 million, an amount equal to Scheduled
Amortization. In addition, Scotia LLC made distributions in the amount of $79.9
million to its parent, Pacific Lumber, $63.9 million of which was made using
funds from the December 2000 sale of the Owl Creek grove and $14.5 million of
which was made using excess funds released from the SAR Account.

      On the note payment date for the Timber Notes in January 2002, Scotia LLC
had $33.9 million set aside in the note payment account to pay the $28.4 million
of interest due as well as $5.5 million of principal. Scotia LLC repaid an
additional $6.1 million of principal using funds held in the SAR Account
resulting in a total principal payment of $11.6 million, an amount equal to
Scheduled Amortization.

      With respect to the note payment due in July 2002, Scotia LLC expects that
it will require funds from the Scotia LLC Line of Credit to pay a portion of the
interest due, and that all of the funds used to pay the Scheduled Amortization
amount will be provided from the SAR Account.

      Lakepointe Notes
      In June 2001, Lakepointe Assets financed the purchase of Lake Pointe Plaza
with proceeds from the Lakepointe Notes (see Note 5). The Lakepointe Notes
consist of $122.5 principal amount of 7.56% notes due June 8, 2021. The
Lakepointe Notes are secured by the Lake Pointe Plaza operating leases, Lake
Pointe Plaza and a $60.0 million residual value insurance contract.

      Maturities
      Scheduled maturities of short-term borrowings and long-term debt
outstanding (before considering any effects of the Cases) at December 31, 2001,
are as follows (in millions):


                                                                  YEARS ENDING DECEMBER 31,
                                         --------------------------------------------------------------------------
                                            2002        2003        2004         2005         2006      THEREAFTER
                                         ----------  ----------- -----------  -----------  -----------  -----------
KACC Credit Agreement................... $       -   $        -  $        -   $        -   $        -   $        -
KACC 9 7 8% Senior Notes................     172.8            -           -            -            -            -
KACC 10 7/8% Senior Notes...............         -            -           -            -        225.0            -
KACC 12 3/4% Senior Subordinated Notes..         -        400.0           -            -            -            -
Alpart CARIFA Loans.....................         -            -           -            -            -         22.0
Other aluminum operations debt..........       0.7          0.7         0.7          0.8          0.8         50.8
MGHI Notes..............................         -         88.2           -            -            -            -
Timber Collateralized Notes.............      14.8         16.7        19.2         21.7         25.3        671.4
Lakepointe 7.56% Notes..................       2.2          2.3         1.4          1.0          1.3        113.5
Other...................................      26.7          5.9         6.6          0.8          1.1         29.6
                                         ----------  ----------- -----------  -----------  -----------  -----------
                                         $   217.2   $    513.8  $     27.9   $     24.3        253.5   $    887.3
                                         ==========  =========== ===========  ===========  ===========  ===========

      Capitalized Interest
      Interest capitalized during the years ended December 31, 2001, 2000 and
1999 was $4.0 million, $7.0 million and $3.5 million, respectively.

      Restricted Net Assets of Subsidiaries and Pledges of Subsidiary Stock
      Certain debt instruments restrict the ability of the Company's
subsidiaries to transfer assets, make loans and advances and pay dividends to
the Company. As of December 31, 2001, all of the assets relating to the
Company's aluminum, forest products and racing operations are subject to such
restrictions and certain assets of the Company's real estate operations are
pledged or serve as collateral. As of April 2002, a total of 23,443,953
shares of Kaiser common stock (representing a 29.1% interest in Kaiser) owned by
MGHI were pledged to secure the MGHI Notes.

12.     INCOME TAXES

      Income taxes are determined using an asset and liability approach which
requires the recognition of deferred income tax assets and liabilities for the
expected future tax consequences of events that have been recognized in the
Company's financial statements or tax returns. Under this method, deferred
income tax assets and liabilities are determined based on the temporary
differences between the financial statement and tax bases of assets and
liabilities using enacted tax rates. The Company files consolidated federal
income tax returns together with its domestic subsidiaries, other than Kaiser
and its subsidiaries. Kaiser and its domestic subsidiaries are members of a
separate consolidated return group which files its own consolidated federal
income tax returns.

      Income before income taxes, minority interests and extraordinary items
by geographic area is as follows (in millions):


                                                                                     YEARS ENDED DECEMBER 31,
                                                                                -----------------------------------
                                                                                   2001        2000        1999
                                                                                ----------  ----------  -----------
Domestic......................................................................  $  (167.7)  $   (44.2)  $    109.5
Foreign.......................................................................      203.7       104.5        (15.0)
                                                                                ----------  ----------  -----------
                                                                                $    36.0   $    60.3   $     94.5
                                                                                ==========  ==========  ===========

      Income taxes are classified as either domestic or foreign based on whether
payment is made or due to the United States or a foreign country. Certain income
classified as foreign is subject to domestic income taxes.

      The provision for income taxes on income before income taxes, minority
interests and extraordinary items consists of the following (in millions):

                                                                                     YEARS ENDED DECEMBER 31,
                                                                                -----------------------------------
                                                                                   2001        2000        1999
                                                                                ----------  ----------  -----------
Current:
   Federal....................................................................  $    (1.1)  $    (1.8)  $     (0.6)
   State and local............................................................       (0.2)       (0.2)           -
   Foreign....................................................................      (40.6)      (35.3)       (23.1)
                                                                                ----------  ----------  -----------
                                                                                    (41.9)      (37.3)       (23.7)
                                                                                ----------  ----------  -----------
Deferred:
   Federal....................................................................     (466.9)       25.7         (8.9)
   State and local............................................................      (25.4)       (6.6)       (18.2)
   Foreign....................................................................        0.5        (8.9)         7.1
                                                                                ----------  ----------  -----------
                                                                                   (491.8)       10.2        (20.0)
                                                                                ----------  ----------  -----------
                                                                                $  (533.7)  $   (27.1)  $    (43.7)
                                                                                ==========  ==========  ===========

      A reconciliation between the provision for income taxes and the amount
computed by applying the federal statutory income tax rate to income before
income taxes and minority interests is as follows (in millions):


                                                                                     YEARS ENDED DECEMBER 31,
                                                                                -----------------------------------
                                                                                   2001        2000        1999
                                                                                ----------  ----------  -----------
Income before income taxes, minority interests and extraordinary items........  $    36.0   $    60.3   $     94.5
                                                                                ==========  ==========  ===========

Amount of federal income tax provision based upon the statutory rate..........  $   (12.6)  $   (21.1)  $    (33.1)
Changes in valuation allowances and revision of prior years' tax estimates ...     (515.2)       (2.3)         4.1
Percentage depletion..........................................................        4.9         3.0          2.8
Foreign taxes, net of federal tax benefit.....................................       (9.6)       (3.2)        (3.2)
State and local taxes, net of federal tax effect..............................       (0.3)       (3.2)       (12.7)
Other.........................................................................       (0.9)       (0.3)        (1.6)
                                                                                ----------  ----------  -----------
                                                                                $  (533.7)  $   (27.1)  $    (43.7)
                                                                                ==========  ==========  ===========

      Changes in valuation allowances and revision of prior years' tax
estimates, as shown in the table above, includes changes in valuation allowances
with respect to deferred income tax assets, amounts for the reversal of reserves
which the Company no longer believes are necessary, and other changes in prior
years' tax estimates. $530.4 million of the changes in valuation allowances and
revision of prior years' tax estimates for 2001 is attributable to additional
valuation allowances on Kaiser's loss and credit carryforwards. Generally, the
reversal of reserves relates to the expiration of the relevant statute of
limitations with respect to certain income tax returns or the resolution of
specific income tax matters with the relevant tax authorities.

      The components of the Company's net deferred income tax assets
(liabilities) are as follows (in millions):


                                                                                                 DECEMBER 31,
                                                                                               2001        2000
                                                                                            ----------  -----------
Deferred income tax assets:
   Postretirement benefits other than pensions............................................  $   268.8   $    271.9
   Loss and credit carryforwards..........................................................      314.9        266.2
   Other liabilities......................................................................      341.0        286.5
   Costs capitalized only for tax purposes................................................       53.0         63.0
   Real estate............................................................................       21.2         28.8
   Timber and timberlands.................................................................       23.8         28.1
   Other..................................................................................       32.2         30.7
   Valuation allowances...................................................................     (669.1)      (137.3)
                                                                                            ----------  -----------
      Total deferred income tax assets, net...............................................      385.8        837.9
                                                                                            ----------  -----------
Deferred income tax liabilities:
   Property, plant and equipment..........................................................     (155.1)      (112.1)
   Deferred gains on sales of timber and timberlands......................................     (111.0)      (130.4)
   Other..................................................................................      (57.4)       (43.6)
                                                                                            ----------  -----------
      Total deferred income tax liabilities...............................................     (323.5)      (286.1)
                                                                                            ----------  -----------
Net deferred income tax assets............................................................  $    62.3   $    551.8
                                                                                            ==========  ===========

      As of December 31, 2001, Kaiser's net deferred tax liability was $39.4
million. The principal component of Kaiser's deferred income tax liabilities is
the tax benefit associated with the accrued liability for postretirement
benefits other than pensions. The future tax deductions with respect to the
turnaround of this accrual will occur over a 30 to 40 year period. If such
deductions create or increase a net operating loss, Kaiser has the ability to
carry forward such loss for 20 taxable years. Accordingly, prior to the Cases,
Kaiser believed that a long-term view of profitability was appropriate and had
concluded that the portion of this deferred income tax asset for which it had
not provided valuation allowances would more likely than not be realized.

      However, in light of the Cases, Kaiser provided additional valuation
allowances of $530.4 million in 2001, of which $505.4 million was recorded in
provision for income taxes in the accompanying consolidated statement of
operations, and $25.0 million was recorded in other comprehensive income (loss)
in the accompanying consolidated balance sheet. The additional valuation
allowances were provided as Kaiser no longer believes that the "more likely than
not" recognition criteria are appropriate given a combination of factors
including: (a) the expiration date of its loss and credit carryforwards; (b) the
possibility that all or a substantial portion of the loss and credit
carryforwards and the tax basis of assets could be reduced to the extent of
cancellation of indebtedness occurring as a part of a reorganization plan; (c)
the possibility that all or a substantial portion of the loss and credit
carryforwards could become limited if a change of ownership occurs as a result
of the Debtors reorganization; and (d) due to updated expectations regarding
near term taxable income. In prior periods, Kaiser had concluded that a
substantial portion of these items would more likely than not be realized (to
the extent not covered by valuation allowances) based on the cyclical nature of
its business, its history of operating earnings, and its then-existing
expectations for future years. The valuation allowances adjustment has no impact
on Kaiser's liquidity, operations or loan compliance and is not intended, in any
way, to be indicative of its long-term prospects or its ability to successfully
reorganize.

      The net deferred income tax assets listed above which are not attributable
to Kaiser are $101.7 million as of December 31, 2001. This amount includes
$155.3 million attributable to the tax benefit of loss and credit carryforwards,
net of valuation allowances. The Company evaluated all appropriate factors in
determining the realizability of the deferred tax assets attributable to loss
and credit carryforwards, including any limitations on their use, the reversal
of deferred gains, other temporary differences, the year the carryforwards
expire and the levels of taxable income necessary for utilization. The Company
also considered the potential recognition for the purposes of the deferred gains
on sales of timber and timberlands. Based on this evaluation of the appropriate
factors to determine the proper valuation allowances for these carryforwards,
the Company believes that it is more likely than not that it will realize the
benefit for the carryforwards for which valuation allowances were not provided.
The deferred income tax liabilities related to deferred gains on sales of timber
and timberlands are a result of the sales of the Headwaters Timberlands (1999),
the Owl Creek grove (2000), and the Grizzly Creek grove (2001). The Company has
reinvested a portion of these proceeds, and expects to make further
reinvestments. Reinvestments beyond the levels currently planned could impact
the Company's evaluation of deferred gains available for offset against net
operating losses and in turn the Company's evaluation of the realizability of
its net operating losses.

      As of December 31, 2001 and 2000, $10.6 million and $64.0 million,
respectively, of the net deferred income tax assets listed above are included in
prepaid expenses and other current assets. Certain other portions of the
deferred income tax liabilities listed above are included in other accrued
liabilities and other noncurrent liabilities.

      Kaiser and its domestic subsidiaries are members of a separate
consolidated return group which files its own consolidated federal income tax
return. During the period from October 28, 1988, through June 30, 1993, Kaiser
and its domestic subsidiaries were included in the consolidated federal income
tax returns of the Company. The tax allocation agreements of Kaiser and KACC
with the Company terminated pursuant to their terms, effective for taxable
periods beginning after June 30, 1993. However, payments or refunds for periods
prior to July 1, 1993 related to certain jurisdictions could still be required
pursuant to Kaiser's and KACC's respective tax allocation agreements with the
Company. Any such payments to the Company by KACC would require approval by the
DIP Facility lenders and the Court. In March 2002, the Company filed a suit with
the Court asking the Court to find that it has no further obligations to the
Debtors under the tax sharing agreement. The Company's suit is based on the
assertion that the agreements are personal contracts and financial
accommodations which cannot be assumed under the Code.

      The following table presents the estimated tax attributes for federal
income tax purposes at December 31, 2001 attributable to the Company and Kaiser
(in millions). The utilization of certain of these tax attributes is subject to
limitations.


                                                                         THE COMPANY                 KAISER
                                                                   -----------------------  -----------------------
                                                                                 EXPIRING                EXPIRING
                                                                                 THROUGH                  THROUGH
                                                                                ----------              -----------
Regular Tax Attribute Carryforwards:
   Current year net operating loss...............................  $     63.5        2021   $      -             -
   Prior year net operating losses...............................       364.3        2020       60.3          2019
   General business tax credits..................................         0.1        2002        1.0          2011
   Foreign tax credits...........................................           -           -       93.6          2006
   Alternative minimum tax credits...............................         1.8   Indefinite      26.9    Indefinite

Alternative Minimum Tax Attribute Carryforwards:
   Current year net operating loss...............................  $     62.4        2021   $      -             -
   Prior year net operating losses...............................       372.0        2020        1.0          2011
   Foreign tax credits...........................................           -           -      105.0          2006

      The income tax credit (provision) related to other comprehensive income
was $(1.3) million, $(0.1) million and $0.7 million for the years ended December
31, 2001, 2000 and 1999, respectively.

13.     EMPLOYEE BENEFIT AND INCENTIVE PLANS

      Pension and Other Postretirement Benefit Plans
      The Company has various retirement plans which cover essentially all
employees. Most of the Company's employees are covered by defined benefit plans.
The benefits are determined under formulas based on the employee's years of
service, age and compensation. The Company's funding policies meet or exceed all
regulatory requirements.

      The Company has unfunded postretirement medical benefit plans which cover
most of its employees. Under the plans, employees are eligible for health care
benefits (and life insurance benefits for Kaiser employees) upon retirement.
Retirees from companies other than Kaiser make contributions for a portion of
the cost of their health care benefits. The expected costs of postretirement
medical benefits are accrued over the period the employees provide services to
the date of their full eligibility for such benefits. Postretirement medical
benefits are generally provided through a self insured arrangement. The Company
has not funded the liability for these benefits, which are expected to be paid
out of cash generated by operations.

      The following tables present the changes, status and assumptions of the
Company's pension and other postretirement benefit plans as of December 31, 2001
and 2000, respectively (in millions):


                                                                      PENSION BENEFITS      MEDICAL/LIFE BENEFITS
                                                                   -----------------------  -----------------------
                                                                               YEARS ENDED DECEMBER 31,
                                                                   ------------------------------------------------
                                                                      2001         2000        2001        2000
                                                                   -----------  ----------  ----------  -----------
Change in benefit obligation: (1)
   Benefit obligation at beginning of year.......................  $    928.3   $   890.9   $   666.7   $    621.8
   Service cost..................................................        41.3        23.0        12.5          5.7
   Interest cost.................................................        68.0        67.4        49.4         45.5
   Plan participants' contributions..............................         2.0         1.7         1.2          1.1
   Actuarial (gain) loss.........................................        36.0        13.8       220.1         81.0
   Currency exchange rate change.................................        (1.4)       (3.4)          -            -
   Curtailments, settlements and amendments......................        (0.2)       33.7       (13.7)       (33.0)
   Benefits paid.................................................       (93.9)      (98.8)      (58.6)       (55.4)
                                                                   -----------  ----------  ----------  -----------
      Benefit obligation at end of year                                 980.1       928.3       877.6        666.7
                                                                   -----------  ----------  ----------  -----------

Change in plan assets: (1)
   Fair value of plan assets at beginning of year................       845.5       948.9           -            -
   Actual return on assets.......................................       (52.2)      (16.8)          -            -
   Employer contributions........................................        23.0        15.0        57.4         54.3
   Currency exchange rate change.................................        (1.1)       (2.8)          -            -
   Plan participants' contributions..............................           -           -         1.2          1.1
   Benefits paid.................................................       (93.9)      (98.8)      (58.6)       (55.4)
                                                                   -----------  ----------  ----------  -----------
   Fair value of plan assets at end of year......................       721.3       845.5           -            -
                                                                   -----------  ----------  ----------  -----------

   Benefit obligation in excess of plan assets(1)................       258.8        82.8       877.6        666.7
   Unrecognized actuarial gain (loss)............................      (127.7)       37.2      (239.0)       (19.2)
   Unrecognized prior service costs..............................       (40.6)      (46.0)       76.7         78.2
   Adjustment required to recognize minimum liability............       105.5         3.0           -            -
   Intangible asset and other....................................        40.3         1.8           -            -
                                                                   -----------  ----------  ----------  -----------
      Accrued benefit liability (1)..............................  $    236.3   $    78.8   $   715.3   $    725.7
                                                                   ===========  ==========  ==========  ===========

------------------------------------

(1)  The December 31, 2000, pension benefit amounts in the above table have been
     revised from previous disclosures to include the balances of Alumina
     Partners of Jamaica ("Alpart") and Kaiser Bauxite Company ("KBC") that were
     already fully reflected in the consolidated balance sheet as of December
     31, 2000.

      With respect to Kaiser's pension plans, the benefit obligation was $915.6
million and $871.4 million as of December 31, 2001 and 2000, respectively. The
benefit obligation exceeded Kaiser's fair value of plan assets by $244.8 million
and $80.3 million as of December 31, 2001 and 2000, respectively.

      The assets of the Company sponsored pension plans, like numerous other
companies' plans, are, to a substantial degree, invested in the capital markets
and managed by a third party. Given the performance of the stock market during
2001, the Company was required to reflect an additional minimum pension liability of
$65.1 million (net of income tax benefit of $38.0 million) in its 2001 financial
statements as a result of a decline in the value of the assets held by Kaiser's
pension plans. Minimum pension liability adjustments are non-cash adjustments
that are reflected as an increase in pension liability and an offsetting charge
to stockholders' equity (net of income tax) through other comprehensive income
(rather than net income). Kaiser also anticipates that the decline in the value
of the pension plans' assets will unfavorably impact pension costs reflected in
its 2002 operating results. However, absent a decision by Kaiser to increase its
contributions to the pension plans as a result of the 2001 asset performance,
such asset performance is not expected to have a material impact on Kaiser's
near-term liquidity as pension funding requirements generally allow for such
impacts to be spread over multiple years. Increases in post-2002 pension funding
requirements could occur, however, if capital market performance in future
periods does not more closely approximate the long-term rate of return assumed
by Kaiser, and the amount of such increases could be material.

      The postretirement medical/life benefit obligation attributable to
Kaiser's plans was $868.2 million and $658.2 million as of December 31, 2001 and
2000, respectively. The postretirement medical/life benefit liability recognized
in the Company's Consolidated Balance Sheet attributable to Kaiser's plans was
$704.2 million and $714.9 million as of December 31, 2001 and 2000,
respectively.


                                                            PENSION BENEFITS             MEDICAL/LIFE BENEFITS
                                                     ------------------------------  ------------------------------
                                                                        YEARS ENDED DECEMBER 31,
                                                     --------------------------------------------------------------
                                                       2001       2000      1999       2001      2000       1999
                                                     ---------  --------  ---------  --------- ---------  ---------
Components of net periodic benefit costs:(1)
   Service cost....................................  $   41.3   $  23.0   $   17.5   $   12.5  $    5.7   $    5.6
   Interest cost...................................      68.0      67.4       63.5       49.4      45.5       42.0
   Expected return on assets.......................     (75.3)    (84.8)     (76.3)         -         -          -
   Amortization of prior service costs.............       5.6       4.0        3.4      (15.1)    (12.9)     (12.1)
   Recognized net actuarial (gain) loss............      (1.0)     (2.5)       0.7       (0.1)     (0.3)      (0.2)
                                                     ---------  --------  ---------  --------- ---------  ---------
   Net periodic benefit costs......................      38.6       7.1        8.8       46.7      38.0       35.3
   Curtailments, settlements and other.............      (0.4)      0.1        0.4       (0.1)       -           -
                                                     ---------  --------  ---------  --------- ---------  ---------
      Adjusted net periodic benefit costs(2).......  $   38.2   $   7.2   $    9.2   $   46.6  $   38.0   $   35.3
                                                     =========  ========  =========  ========= =========  =========

------------------------------------

(1)  The December 31, 2000 net periodic benefit costs in the above table have
     been revised from previous disclosures to include the balances of Alpart
     and KBC that were fully reflected in the statement of consolidated income
     (loss) for the year ended December 31, 2000. The costs in the table for
     1999 were not revised because the amounts were not material.
(2)  Approximately $24.5 million of the $36.3 million adjusted net periodic
     benefit costs in 2001 and $6.1 million of the $5.3 million adjusted net
     periodic benefit costs in 2000 related to pension accruals that were
     provided in respect to headcount reductions resulting from the performance
     improvement program (see Note 1) and the Pacific Northwest power sales (see
     Note 4).

      The net periodic pension costs attributable to Kaiser's plans was $36.3
million, $5.3 million and $5.8 million for the years ended December 31, 2001,
2000 and 1999, respectively.

      Included in the net periodic postretirement medical/life benefit cost is
$45.7 million, $37.5 million and $34.6 million for the years ended December 31,
2001, 2000 and 1999, respectively, attributable to Kaiser's plans.

      The accumulated benefit obligation and aggregate fair value of plan assets
for pension plans with accumulated benefit obligations in excess of plan assets
were $920.6 million and $685.1 million, respectively, as of December 31, 2001,
and $827.5 million and $783.2 million, respectively, as of December 31, 2000.


                                                                    PENSION BENEFITS        MEDICAL/LIFE BENEFITS
                                                                ------------------------  -------------------------
                                                                             YEARS ENDED DECEMBER 31,
                                                                ---------------------------------------------------
                                                                 2001    2000     1999     2001     2000     1999
                                                                ------- -------  -------  -------  -------  -------
Weighted-average assumptions:
   Discount rate..............................................     7.3%    7.8%     7.8%     7.3%     7.8%     7.8%
   Expected return on plan assets.............................     9.5%    9.5%     9.5%       -        -        -
   Rate of compensation increase..............................     4.0%    4.0%     4.0%     4.0%     4.0%     4.0%

      In 2001, the average annual assumed rate of increase in the per capita
cost of covered benefits (i.e. health care cost trend rate) is 7.5% for all
participants. The assumed rate of increase is assumed to decline gradually to
5.0% in 2006 for all participants and remain at that level thereafter. Assumed
health care cost trend rates have a significant effect on the amounts reported
for the health care plan. A one-percentage-point change in assumed health care
cost trend rates as of December 31, 2001 would have the following effects (in
millions):


                                                                                   1-PERCENTAGE-     1-PERCENTAGE-
                                                                                   POINT INCREASE    POINT DECREASE
                                                                                  ----------------  ----------------
Effect on total of service and interest cost components.......................... $       7.0       $    (5.8)
Effect on the postretirement benefit obligations.................................        92.8           (65.3)

      The foregoing medical benefit liability and cost data does not reflect the
fact that in February 2002, Kaiser notified its salaried retirees that, given
the significant escalation in medical costs and the increased burden it was
creating, Kaiser was going to require such retirees to fund a portion of their
medical costs beginning May 1, 2002. The impact of such changes will be to
reduce the estimated cash payments by Kaiser by approximately $10.0 million per
year. The financial statement benefits of this change will, however, be
reflected over the remaining employment period of Kaiser's employees in
accordance with generally accepted accounting principles.

      Savings and Incentive Plans
      The Company has various defined contribution savings plans designed to
enhance the existing retirement programs of participating employees. Kaiser has
an unfunded incentive compensation program which provides incentive compensation
based upon performance against annual plans and over rolling three-year periods.
Expenses incurred by the Company for all of these plans were $6.4 million, $7.7
million and $7.8 million for the years ended December 31, 2001, 2000 and 1999,
respectively.

14.   MINORITY INTERESTS

      Minority interests are attributable to Kaiser as follows (in millions):

                                                                                                 DECEMBER 31,
                                                                                            -----------------------
                                                                                               2001        2000
                                                                                            ----------  -----------

   Kaiser common stock, par $.01..........................................................  $       -   $     31.7
   Minority interests attributable to Kaiser's subsidiaries...............................      118.5        101.1
                                                                                            ----------  -----------
                                                                                            $   118.5   $    132.8
                                                                                            ==========  ===========

      As a result of significant losses at Kaiser for the year ended December 31,
2001, minority interest in Kaiser was reduced to zero.  Accordingly, the Company
was required to recognize 100% of Kaiser's losses from that point forward.

      KACC Redeemable Preference Stock
      In 1985, KACC issued its Cumulative (1985 Series A) Preference Stock and
its Cumulative (1985 Series B) Preference Stock (together, the "REDEEMABLE
PREFERENCE STOCK") each of which has a par value of $1 per share and a
liquidation and redemption value of $50 per share plus accrued dividends, if
any. In connection with the USWA settlement agreement, during March 2001, KACC
redeemed all of the remaining Redeemable Preference Stock (350,872 shares
outstanding at December 31, 2000). The amount applicable to the unredeemed
shares at December 31, 2000, of $17.5 million is included in other accrued
liabilities. The net cash impact of the redemption on Kaiser was only
approximately $5.6 million because approximately $12.0 million of the redemption
amount had previously been funded into redemption funds (included in prepaid
expenses and other current assets).

      Preference Stock
      KACC has four series of $100 par value Cumulative Convertible Preference
Stock ("$100 PREFERENCE STOCK") outstanding with annual dividend requirements of
between 4 1/8% and 4 3/4%. KACC has the option to redeem the $100 Preference
Stock at par value plus accrued dividends. KACC does not intend to issue any
additional shares of the $100 Preference Stock. The $100 Preference Stock can be
exchanged for per share cash amounts between $69 to $80. KACC records the $100
Preference Stock at their exchange amounts for financial statement presentation
and the Company includes such amounts in minority interests. At December 31,
2001 and 2000, outstanding shares of $100 Preference Stock were 8,969 and 9,250,
respectively. In accordance with the Code and DIP Facility, KACC is not
permitted to repurchase any of its stock. Further, as a part of a plan of
reorganization, it is possible that the interests of the holders of the $100
Preference Stock could be diluted or cancelled.

      Kaiser Common Stock Incentive Plans
      Kaiser has a total of 8,000,000 shares of Kaiser common stock reserved for
issuance under its incentive compensation programs. At December 31, 2001,
3,573,728 shares were available for issuance under these plans. Pursuant to
Kaiser's nonqualified stock option program, stock options are granted at or
above the prevailing market price, generally vest at the rate of 20% to 33% per
year and have a five or ten year term. Information relating to nonqualified
stock options is shown below. The prices shown in the table below are the
weighted average price per share for the respective number of underlying shares.


                                           2001                        2000                        1999
                                --------------------------  --------------------------- ---------------------------
                                   SHARES        PRICE         SHARES        PRICE         SHARES        PRICE
                                ------------  ------------  ------------  ------------- ------------- -------------
Outstanding at beginning of
   year.......................    4,375,947   $     10.24     4,239,210   $      10.24     3,049,122  $       9.98
Granted.......................      874,280          2.89       757,335          10.23     1,218,068         11.15
Exercised.....................            -                           -                       (7,920)         7.25
Expired or forfeited..........   (3,689,520)        10.39      (620,598)         11.08       (20,060)        11.02
                                ------------                ------------                -------------
Outstanding at end of year....    1,560,707          8.37     4,375,947          10.24     4,239,210         10.24
                                ============                ============                =============

Exercisable at end of year....      695,183   $      9.09     2,380,491   $      10.18     1,763,852  $      10.17
                                ============                ============                =============

      Options exercisable at December 31, 2001, had exercise prices ranging from
$1.72 to $12.75 and a weighted average remaining contractual life of 2.7 years.

      During 2001, Kaiser completed an exchange with certain employees who held
stock options to purchase Kaiser's common stock whereby a total of approximately
3,617,000 options were exchanged (on a fair value basis) for approximately
1,086,000 restricted shares of Kaiser's common stock. The fair value of the
restricted shares issued is being amortized to expense over the three-year
period during which the restrictions lapse. In March 2002, approximately 155,000
restricted shares, all of which had not been vested, were voluntarily forfeited
by certain employees.

      As a part of the Cases, it is possible that the interests of the holders
of outstanding options for Kaiser common stock could be diluted or cancelled.

15.   STOCKHOLDERS' EQUITY (DEFICIT)

      Preferred Stock
      The holders of the Company's Class A $0.05 Non-Cumulative Participating
Convertible Preferred Stock (the "CLASS A PREFERRED STOCK") are entitled to
receive, if and when declared, preferential cash dividends at the rate of $0.05
per share per annum and will participate thereafter on a share for share basis
with the holders of common stock in all cash dividends, other than cash
dividends on the common stock in any fiscal year to the extent not exceeding
$0.05 per share. Stock dividends declared on the common stock will result in the
holders of the Class A Preferred Stock receiving an identical stock dividend
payable in shares of Class A Preferred Stock. At the option of the holder, the
Class A Preferred Stock is convertible at any time into shares of common stock
at the rate of one share of common stock for each share of Class A Preferred
Stock. Each holder of Class A Preferred Stock is generally entitled to ten votes
per share on all matters presented to a vote of the Company's stockholders.

      Stock Option and Restricted Stock Plans
      In 1994, the Company adopted the MAXXAM 1994 Omnibus Employee Incentive
Plan (the "1994 OMNIBUS PLAN"). Up to 1,000,000 shares of common stock and
1,000,000 shares of Class A Preferred Stock were reserved for awards or for
payment of rights granted under the 1994 Omnibus Plan of which 23,092 and
910,000 shares, respectively, were available to be awarded at December 31, 2001.
The 1994 Omnibus Plan replaced the Company's 1984 Phantom Share Plan (the "1984
PLAN") which expired in June 1994, although previous grants thereunder remain
outstanding. The options (or rights, as applicable) granted in 1999, 2000 and
2001 generally vest at the rate of 20% per year commencing one year from the
date of grant. The following table summarizes the options or rights outstanding
and exercisable relating to the 1984 Plan and the 1994 Omnibus Plan. The prices
shown are the weighted average price per share for the respective number of
underlying shares.


                                           2001                        2000                        1999
                                --------------------------  --------------------------- ---------------------------
                                   SHARES         PRICE        SHARES         PRICE        SHARES         PRICE
                                ------------  ------------  ------------  ------------- ------------- -------------
Outstanding at beginning of
   year.......................      601,200   $     34.96       401,400   $      44.36       302,000  $      41.88
Granted.......................      233,600         18.09       199,800          16.08       107,500         51.12
Exercised.....................            -             -             -              -        (6,600)        38.31
Expired or forfeited..........      (34,700)        33.02             -              -        (1,500)        56.00
                                ------------                ------------                -------------
Outstanding at end of year....      800,100         30.12       601,200          34.96       401,400         44.36
                                ============                ============                =============

Exercisable at end of year....      312,120   $     39.32       225,500   $      41.09       160,400  $      38.42
                                ============                ============                =============

      The following table summarizes information about stock options outstanding
as of December 31, 2001:


                                                       WEIGHTED AVERAGE
        RANGE OF                                          REMAINING                    WEIGHTED AVERAGE              OPTIONS
    EXERCISE PRICES               SHARES               CONTRACTUAL LIFE                 EXERCISE PRICE             EXERCISABLE
------------------------     -----------------    --------------------------       -------------------------     ----------------
    $15.90 - $19.55                   419,800               9.5 years                   $         17.19                   37,240
         $28.00                         6,000               0.9 years                             28.00                    6,000
    $30.38 - $45.50                   213,800               5.2 years                             39.18                  167,080
    $46.80 - $56.00                   160,500               6.1 years                             51.95                  101,800
                             -----------------                                                                   ----------------
                                      800,100               7.6 years                             30.12                  312,120
                             =================                                                                   ================

      In addition to the options reflected in the table above, the Company
granted 256,808 shares of restricted Common Stock in 1999 under the 1994 Omnibus
Plan. These shares were granted in connection with a bonus earned under an
executive bonus plan. The Company recorded an $11.7 million non-cash charge to
selling, general and administrative expenses for the year ended December 31,
1999 for the fair market value of these shares on the date of grant. The
restricted shares are subject to certain provisions that lapse in 2014.

      Concurrent with the adoption of the 1994 Omnibus Plan, the Company adopted
the MAXXAM 1994 Non-Employee Director Plan (the "1994 DIRECTOR PLAN"). Up to
35,000 shares of common stock are reserved for awards under the 1994 Director
Plan. Options were granted to non-employee directors to purchase 2,400 shares of
common stock in 2001, 2,300 shares in 2000, and 1,800 shares in 1999. The
weighted average exercise prices of these options are $17.02, $26.19 and $62.00
per share, respectively, based on the quoted market price at the date of grant.
The options vest at the rate of 25% per year commencing one year from the date
of grant. At December 31, 2001, options for 13,400 shares were outstanding,
7,925 of which were exercisable.

      Pro Forma Disclosures
      The Company applies the "intrinsic value" method described by Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" and
related interpretations to account for stock and stock-based compensation
awards. In accordance with SFAS No. 123, "Accounting for Stock-Based
Compensation," the Company calculated compensation expense for all stock options
granted using the "fair value" method. Under this alternative accounting method,
net income and net income per share would have been as follows (in millions,
except share information):


                                                                                     YEARS ENDED DECEMBER 31,
                                                                                -----------------------------------
                                                                                   2001        2000        1999
                                                                                ----------  ----------  -----------
Income (loss) before extraordinary items......................................  $  (465.1)  $    21.6   $     69.1
Net income (loss).............................................................     (461.5)       25.5         69.1

Earnings (loss) per share before extraordinary items:
   Basic......................................................................     (70.66)       2.86         8.99
   Diluted....................................................................     (70.66)       2.85         8.91

Net income (loss) per share:
   Basic......................................................................     (70.11)       3.37         8.99
   Diluted....................................................................     (70.11)       3.37         8.91


      The average fair values of the options granted were $8.69 in 2001, $7.40
in 2000, and $24.15 in 1999. The Company estimated the fair value of each option
at the grant date using a Black-Scholes option pricing model and the following
assumptions:


                                                                                     YEARS ENDED DECEMBER 31,
                                                                                -----------------------------------
                                                                                   2001        2000        1999
                                                                                ----------  ----------  -----------
Divided yield.................................................................          -           -            -
Expected volatility...........................................................       0.39        0.36         0.35
Risk-free interest rate.......................................................      4.99%       5.11%        5.72%
Expected life (years).........................................................       6.59        6.59         6.59

      Shares Reserved for Issuance
      At December 31, 2001, the Company had 2,446,582 common shares and
1,000,000 Class A Preferred shares reserved for future issuances in connection
with various options, convertible securities and other rights as described in
this Note.

      Rights

      On December 15, 1999, the Board of Directors of the Company declared a
dividend to its stockholders consisting of (i) one Series A Preferred Stock
Purchase Right (the "SERIES A RIGHT") for each outstanding share of the
Company's Class A Preferred Stock and (ii) one Series B Preferred Stock Purchase
Right (the "SERIES B RIGHT") for each outstanding share of the Company's common
stock. The Series A Rights and the Series B Rights are collectively referred to
herein as the "RIGHTS". The Rights are exercisable only if a person or group of
affiliated or associated persons (an "ACQUIRING PERSON") acquires beneficial
ownership, or the right to acquire beneficial ownership, of 15% or more of the
Company's common stock, or announces a tender offer that would result in
beneficial ownership of 15% or more of the outstanding common stock. Any person
or group of affiliated or associated persons who, as of December 15, 1999, was
the beneficial owner of at least 15% of the outstanding common stock will not be
deemed to be an Acquiring Person unless such person or group acquires beneficial
ownership of additional shares of common stock (subject to certain exceptions).
Each Series A Right, when exercisable, entitles the registered holder to
purchase from the Company one share of Class A Preferred Stock at an exercise
price of $165.00. Each Series B Right, when exercisable, entitles the registered
holder to purchase from the Company one one-hundredth of a share of the
Company's new Class B Junior Participating Preferred Stock, with a par value of
$0.50 per share (the "JUNIOR PREFERRED STOCK"), at an exercise price of $165.00
per one-hundredth of a share. The Junior Preferred Stock has a variety of rights
and preferences, including a liquidation preference of $75.00 per share and
voting, dividend and distribution rights which make each one-hundredth of a
share of Junior Preferred Stock equivalent to one share of the Company's common
stock.

      Under certain circumstances, including if any person becomes an Acquiring
Person other than through certain offers for all outstanding shares of stock of
the Company, or if an Acquiring Person engages in certain "self-dealing"
transactions, each Series A Right would enable its holder to buy Class A
Preferred Stock (or, under certain circumstances, preferred stock of an
acquiring company) having a value equal to two times the exercise price of the
Series A Right, and each Series B Right shall enable its holder to buy common
stock of the Company (or, under certain circumstances, common stock of an
acquiring company) having a value equal to two times the exercise price of the
Series B Right. Under certain circumstances, Rights held by an Acquiring Person
will be null and void. In addition, under certain circumstances, the Board is
authorized to exchange all outstanding and exercisable Rights for stock, in the
ratio of one share of Class A Preferred Stock per Series A Right and one share
of common stock of the Company per Series B Right. The Rights, which do not have
voting privileges, expire on December 11, 2009 but may be redeemed by action of
the Board prior to that time for $0.01 per right, subject to certain
restrictions.

      Voting Control
      As of December 31, 2001, Federated Development Inc., a wholly owned
subsidiary of Federated Development Company ("FEDERATED"), and Mr. Charles E.
Hurwitz beneficially owned (exclusive of securities acquirable upon exercise of
stock options) an aggregate of 99.2% of the Company's Class A Preferred Stock
and 44.9% of the Company's common stock (resulting in combined voting control of
approximately 73.8% of the Company). Mr. Hurwitz is the Chairman of the Board
and Chief Executive Officer of the Company and Chairman and Chief Executive
Officer of Federated. Federated is wholly owned by Mr. Hurwitz, members of his
immediate family and trusts for the benefit thereof.

16.   Commitments and Contingencies

      Commitments
      Minimum rental commitments under operating leases at December 31, 2001 are
as follows: years ending December 31, 2002 - $42.6 million; 2003 - $37.9
million; 2004 - $33.7 million; 2005 - $29.8 million; 2006 - 29.1 million;
thereafter - $46.4 million. Rental expense for operating leases was $46.9
million, $48.6 million and $47.3 million for the years ended December 31, 2001,
2000 and 1999, respectively. The future minimum rentals receivable under
subleases at December 31, 2001 were $104.5 million. Minimum rental commitments
attributable to Kaiser's operating leases were $197.8 million as of December
31, 2001. Pursuant to the Code, the Debtors may elect to reject or assume
unexpired pre-petition leases. At this time, no decisions have been made as to
which significant leases will be accepted or rejected.

      The Lake Pointe Plaza building is leased to tenants under operating
leases. Building lease terms are for 20 years. Minimum rentals on operating
leases are contractually due as follows: 2002 - $11.3 million; 2003 - $11.3
million; 2004 - $10.2 million; 2005 - $9.7 million; 2006 - $10.2 million;
thereafter - $155.8 million.

      Kaiser has a variety of financial commitments, including purchase
agreements, tolling arrangements, forward foreign exchange and forward sales
contracts (see Note 17), letters of credit, and guarantees. Such purchase
agreements and tolling arrangements include long-term agreements for the
purchase and tolling of bauxite into alumina in Australia by QAL. These
obligations are scheduled to expire in 2008. Under the agreements, Kaiser is
unconditionally obligated to pay its proportional share of debt, operating
costs, and certain other costs of QAL. Kaiser's share of the aggregate minimum
amount of required future principal payments at December 31, 2001, is $79.4
million which matures as follows: $30.4 million in 2002, $32.0 million in 2003
and $17.0 million in 2006. Kaiser's share of payments, including operating costs
and certain other expenses under the agreements, has ranged between $92.0
million - $103.0 million over the past three years. Kaiser also has agreements
to supply alumina to and to purchase aluminum from Anglesey.

      Kaiser has a long-term liability, net of estimated sublease income
(included in other noncurrent liabilities), on a building in which Kaiser has
not maintained offices for a number of years, but for which it is responsible
for lease payments as master tenant through 2008 under a sale-and-leaseback
agreement. During 2000, Kaiser reduced its net lease obligation by $17.0 million
(see Note 2) to reflect new third-party sublease agreements which resulted in
occupancy and lease rates above those previously projected.

   Aluminum Operations

      Kaiser's contingencies are discussed below. As discussed in Note 1, the
Company believes additional losses related to its investment in Kaiser are not
probable. Accordingly, the ultimate resolution of the Kaiser contingencies
discussed below are not expected to impact the Company's financial results.

      Impact of Reorganization Proceedings
      During the pendency of the Cases, substantially all pending litigation,
except certain environmental claims and litigation, against the Debtors is
stayed. Generally, claims arising from actions or omissions prior to the Filing
Date will be settled in connection with the plan of reorganization.

      Environmental Contingencies
      Kaiser is subject to a number of environmental laws and regulations, to
fines or penalties assessed for alleged breaches of the environmental laws and
regulations, and to claims and litigation based upon such laws. Kaiser is
subject to a number of claims under the Comprehensive Environmental Response,
Compensation and Liability Act of 1980 (as amended by the Superfund Amendments
Reauthorization Act of 1986, "CERCLA") and, along with certain other entities,
has been named as a potentially responsible party for remedial costs at certain
third-party sites listed on the National Priorities List under CERCLA.

      Based on Kaiser's evaluation of these and other environmental matters,
Kaiser has established environmental accruals primarily related to potential
solid waste disposal and soil and groundwater remediation matters. During 2001,
Kaiser's ongoing assessment process resulted in Kaiser recording charges of
$13.5 million (included in investment, interest and other income (expense), net;
see Note 2) to increase its environmental accrual. Additionally, Kaiser's
environmental accruals were increased during 2001 by approximately $6.0 million
in connection with the purchase of certain property. The following table
presents the changes in such accruals, which are primarily included in other
noncurrent liabilities (in millions):


                                                    YEARS ENDED DECEMBER 31,
                                               -----------------------------------
                                                  2001        2000        1999
                                               ----------  ----------  -----------
Balance at beginning of year.................. $    46.1   $    48.9   $     50.7
Additional accruals...........................      23.1         2.6          1.6
Less expenditures.............................      (8.0)       (5.4)        (3.4)
                                               ----------  ----------  -----------
Balance at end of year........................ $    61.2   $    46.1   $     48.9
                                               ==========  ==========  ===========

      These environmental accruals represent Kaiser's estimate of costs
reasonably expected to be incurred based on presently enacted laws and
regulations, currently available facts, existing technology, and Kaiser's
assessment of the likely remediation actions to be taken. Kaiser expects that
these remediation actions will be taken over the next several years and
estimates that annual expenditures to be charged to these environmental accruals
will be approximately $1.3 million to $12.2 million for the years 2002 through
2006 and an aggregate of approximately $24.8 million thereafter.

      As additional facts are developed and definitive remediation plans and
necessary regulatory approvals for implementation of remediation are established
or alternative technologies are developed, changes in these and other factors
may result in actual costs exceeding the current environmental accruals. Kaiser
believes that it is reasonably possible that costs associated with these
environmental matters may exceed current accruals by amounts that could range,
in the aggregate, up to an estimated $27.0 million. As the resolution of these
matters is subject to further regulatory review and approval, no specific
assurance can be given as to when the factors upon which a substantial portion
of this estimate is based can be expected to be resolved. However, Kaiser is
working to resolve certain of these matters.

      Kaiser believes that it has insurance coverage available to recover
certain incurred and future environmental costs and is pursuing claims in this
regard. However, no amounts have been accrued in the financial statements with
respect to such potential recoveries.

      While uncertainties are inherent in the final outcome of these
environmental matters, and it is presently impossible to determine the actual
costs that ultimately may be incurred, Kaiser's management believes that the
resolution of such uncertainties should not have a material adverse effect on
Kaiser's consolidated financial position, results of operations, or liquidity.

      Asbestos Contingencies
      Kaiser has been one of many defendants in a number of lawsuits, some of
which involve claims of multiple persons, in which the plaintiffs allege that
certain of their injuries were caused by, among other things, exposure to
asbestos during, and as a result of, their employment or association with Kaiser
or exposure to products containing asbestos produced or sold by Kaiser. The
lawsuits generally relate to products Kaiser has not sold for more than 20
years.

      The following table presents the changes in number of such claims pending
for the years ended December 31, 2001, 2000, and 1999.

                                                                                     YEARS ENDED DECEMBER 31,
                                                                                -----------------------------------
                                                                                   2001        2000        1999
                                                                                ----------  ----------  -----------
Number of claims at beginning of year.........................................    110,800     100,000       86,400
Claims received...............................................................     34,000      30,600       29,300
Claims settled or dismissed...................................................    (32,000)    (19,800)     (15,700)
                                                                                ----------  ----------  -----------
Number of claims at end of year...............................................    112,800     110,800       100,000
                                                                                ==========  ==========  ===========
Number of claims at end of period (included above) covered by agreements under
   which Kaiser expects to settle over an extended period.....................     49,700      66,900       31,900
                                                                                ==========  ==========  ===========

      Due to the Cases, holders of asbestos claims are stayed from continuing to
prosecute pending litigation and from commencing new lawsuits against the
Debtors. However, during the pendency of the Cases, Kaiser expects additional
asbestos claims will be filed as part of the claims process. A separate
creditors' committee representing the interests of the asbestos claimants has
been appointed. The Debtors' obligations with respect to present and future
asbestos claims will be resolved pursuant to a plan of reorganization.

      Kaiser maintains a liability for estimated asbestos-related costs for
claims filed to date and an estimate of claims to be filed over a 10 year period
(i.e., through 2011). Kaiser's estimate is based on its view, at each balance
sheet date, of the current and anticipated number of asbestos-related claims,
the timing and amounts of asbestos-related payments, the status of ongoing
litigation and settlement initiatives, and the advice of Wharton Levin
Ehrmantraut Klein & Nash, P.A., with respect to the current state of the law
related to asbestos claims. However, there are inherent uncertainties involved
in estimating asbestos-related costs, and Kaiser's actual costs could exceed its
estimates due to changes in facts and circumstances after the date of each
estimate. Further, while Kaiser does not believe there is a reasonable basis for
estimating asbestos-related costs beyond 2011 and, accordingly, no accrual has
been recorded for any costs which may be incurred beyond 2011, Kaiser expects
that the plan of reorganization process may require an estimation of Kaiser's
entire asbestos-related liability, which may go beyond 2011, and that such costs
could be substantial.

      Kaiser believes that it has insurance coverage available to recover a
substantial portion of its asbestos-related costs. Although Kaiser has settled
asbestos-related coverage matters with certain of its insurance carriers, other
carriers have not yet agreed to settlements, and disputes with certain carriers
exist. The timing and amount of future recoveries from these and other insurance
carriers will depend on the pendency of the Cases and on the resolution of any
disputes regarding coverage under the applicable insurance policies. Kaiser
believes that substantial recoveries from the insurance carriers are probable
and additional amounts may be recoverable in the future if additional claims are
added. Kaiser reached this conclusion after considering its prior
insurance-related recoveries in respect of asbestos-related claims, existing
insurance policies, and the advice of Heller Ehrman White & McAuliffe LLP with
respect to applicable insurance coverage law relating to the terms and
conditions of those policies. During 2000, Kaiser filed suit against a group of
its insurers, after negotiations with certain of the insurers regarding an
agreement covering both reimbursement amounts and the timing of reimbursement
payments were unsuccessful. During October 2001, the court ruled favorably on a
number of issues, and during February 2002, an intermediate appellate court also
ruled favorably on an issue involving coverage. The rulings did not result in
any changes to Kaiser's estimates of its current or future asbestos-related
insurance recoveries. Other courts may hear additional issues from time to time.
Moreover, Kaiser expects to amend its lawsuit during the second quarter of 2002
to add additional insurers who may have responsibility to respond for
asbestos-related costs. Given the expected significance of probable future
asbestos-related payments, the receipt of timely and appropriate payments from
such insurers is critical to a successful plan of reorganization and Kaiser's
long-term liquidity.

      The following tables present the historical information regarding Kaiser's
asbestos-related balances and cash flows (in millions).


                                                                                                December 31,
                                                                                         --------------------------
                                                                                            2001           2000
                                                                                         -----------   ------------
Liability (current portion of $130.0 in both years)......................................$    621.3    $     492.4
Receivable (included in long-term receivables and other assets)(1).......................    (501.2)        (406.3)
                                                                                         -----------   ------------

                                                                                         $    120.1    $      86.1
                                                                                         ===========   ============
----------------

(1)   The asbestos-related receivable was determined on the same basis as the
      asbestos-related cost accrual. However, no assurances can be given that
      Kaiser will be able to project similar recovery percentages for future
      asbestos-related claims or that the amounts related to future
      asbestos-related claims will not exceed Kaiser's aggregate insurance
      coverage. As of December 31, 2001, and December 31, 2000, $33.0 million
      and $36.9 million, respectively, of the receivable amounts relate to costs
      paid by Kaiser. The remaining receivable amounts relate to costs that are
      expected to be paid by Kaiser in the future.


                                                                     YEAR ENDED DECEMBER 31,
                                                              ------------------------------------     INCEPTION
                                                                 2001        2000         1999          TO DATE
                                                              ----------  ----------  ------------  ---------------
Payments made, including related legal costs...............   $   118.1   $    99.5   $      24.6   $        338.6
Insurance recoveries.......................................       (90.3)      (62.8)         (6.6)          (221.6)
                                                              ----------  ----------  ------------  ---------------
                                                              $    27.8   $    36.7   $      18.0   $        117.0
                                                              ==========  ==========  ============  ===============

      During the pendency of the Cases, all asbestos litigation is stayed. As a
result, Kaiser does not expect to make any asbestos payments in the near term.
Despite the Cases, Kaiser continues to pursue insurance collections in respect
of asbestos-related amounts paid prior to the Filing Date.

      Kaiser's management continues to monitor claims activity, the status of
lawsuits (including settlement initiatives), legislative developments, and costs
incurred in order to ascertain whether an adjustment to the existing accruals
should be made to the extent that historical experience may differ significantly
from Kaiser's underlying assumptions. This process resulted in Kaiser recording
charges of $57.2 million, $43.0 million, and $53.2 million (included in
investment, interest and other income (expense), see Note 2) in the years ended
December 31, 2001, 2000, and 1999, respectively, for asbestos-related claims,
net of expected insurance recoveries, based on recent cost and other trends
experienced by Kaiser and other companies. Additional asbestos-related claims
are likely to be filed against Kaiser as a part of the Chapter 11 process.
Kaiser's management cannot reasonably predict the ultimate number of such claims
or the amount of the associated liability. However, it is likely that such
amounts could exceed, perhaps significantly, the liability amount reflected in
Kaiser's consolidated financial statements, which (as previously stated) is only
reflective of an estimate of claims over the next ten-year period. Kaiser's
obligations in respect of the currently pending and future asbestos-related
claims will ultimately be determined (and resolved) as a part of the overall
Chapter 11 proceedings. It is anticipated that resolution of these matters will
be a lengthy process. Kaiser's management will continue to periodically reassess
its asbestos-related liabilities and estimated insurance recoveries as the Cases
proceed. However, absent unanticipated developments such as asbestos-related
legislation, material developments in other asbestos-related proceedings or in
Kaiser's Chapter 11 proceedings, it is not anticipated that Kaiser will have
sufficient information to reevaluate its asbestos-related obligations and
estimated insurance recoveries until much later in the Cases. Any adjustments
ultimately deemed to be required as a result of the reevaluation of Kaiser's
asbestos-related liabilities or estimated insurance recoveries could have a
material impact on Kaiser's future financial statements.

      Labor Matters
      In connection with the USWA strike and subsequent lock-out by Kaiser,
which was settled in September 2000, certain allegations of ULPs were filed with
the National Labor Relations Board ("NLRB") by the USWA. Kaiser responded to all
such allegations and believes that they were without merit. Twenty-two of
twenty-four allegations of ULPs previously brought against Kaiser by the USWA
have been dismissed. A trial before an administrative law judge for the two
remaining allegations concluded in September 2001. A decision is not expected
until sometime after the first quarter of 2002. Any outcome from the trial
before the administrative law judge would be subject to additional appeals by
the general counsel of the NLRB, the USWA or Kaiser. This process could take
months or years. This matter is currently not stayed by the Cases. Kaiser
continues to believe that the charges are without merit. While uncertainties are
inherent in matters such as this and it is presently impossible to determine the
remedy, if any, that may ultimately arise in connection with this matter, Kaiser
does not believe that the outcome of this matter will have a material adverse
impact on Kaiser's liquidity or financial position. However, no assurances can
be given in this regard. Amounts due, if any, in satisfaction of this matter
could be significant to the results of the period in which they are recorded. If
these proceedings eventually resulted in a final ruling against Kaiser with
respect to either allegation, it could be liable for back pay to USWA members at
the five plants and such amount could be significant. Any liability ultimately
determined to exist in this matter will be dealt with in the overall context of
the Debtors' plan of reorganization.

      Forest Products Operations

      Regulatory and environmental matters play a significant role in the
Company's forest products business, which is subject to a variety of California
and federal laws and regulations, as well as the HCP and the SYP, dealing with
timber harvesting practices, threatened and endangered species and habitat for
such species, and air and water quality.

       The SYP complies with regulations of the California Board of Forestry and
Fire Protection requiring timber companies to project timber growth and harvest
on their timberlands over a 100-year planning period and to demonstrate that
their projected average annual harvest for any decade within a 100-year planning
period will not exceed the average annual harvest level during the last decade
of the 100-year planning period. The SYP is effective for 10 years (subject to
review after five years) and may be amended by Pacific Lumber, subject to
approval by the California Department of Forestry and Fire Protection
(the"CDF"). Revised SYPs will be prepared every decade that address the harvest
level based upon reassessment of changes in the resource base and other factors.
The HCP and incidental take permits related to the HCP (the "PERMITS") allow
incidental "take" of certain species located on the Company's timberlands which
species have been listed as endangered or threatened under the federal
Endangered Species Act (the "ESA") and/or the California Endangered Species Act
(the"CESA") so long as there is no "jeopardy" to the continued existence of such
species. The HCP identifies the measures to be instituted in order to minimize
and mitigate the anticipated level of take to the greatest extent practicable.
The SYP is also subject to certain of these provisions. The HCP and related
Permits have a term of 50 years.

      Under the federal Clean Water Act (the "CWA"), the Environmental
Protection Agency (the "EPA") is required to establish total maximum daily load
limits (the "TMDLS") in water courses that have been declared to be "water
quality impaired." The EPA and the North Coast Regional Water Quality Control
Board (the "NORTH COAST WATER BOARD") are in the process of establishing TMDLs
for 17 northern California rivers and certain of their tributaries, including
nine water courses that flow within the Company's timberlands. The Company
expects this process to continue into 2010. In December 1999, the EPA issued a
report dealing with TMDLs on two of the nine water courses. The agency indicated
that the requirements under the HCP would significantly address the sediment
issues that resulted in TMDL requirements for these water courses. However, the
September 2000 report by the staff of the North Coast Water Board proposed
various actions, including restrictions on harvesting beyond those required
under the HCP. Establishment of the final TMDL requirements applicable to the
Company's timberlands will be a lengthy process, and the final TMDL requirements
applicable to the Company's timberlands may require aquatic protection measures
that are different from or in addition to the prescriptions to be developed
pursuant to the watershed analysis process provided for in the HCP.

      Since the consummation of the Headwaters Agreement in March 1999, there
has been a significant amount of work required in connection with the
implementation of the Environmental Plans, and this work is expected to continue
for several more years. During the implementation period, government agencies
had until recently failed to approve THPs in a timely manner. The rate of
approvals of THPs during 2001 improved over that for the prior year, and further
improvements have been experienced thus far in 2002. However, it continues to be
below levels which meet the Company's expectations. Nevertheless, the Company
anticipates that once the Environmental Plans are fully implemented, the process
of preparing THPs will become more streamlined, and the time to obtain approval
of THPs will potentially be shortened.

      Lawsuits are pending and threatened which seek to prevent the Company from
implementing the HCP and/or the SYP, implementing certain of the Company's
approved THPs, or carrying out certain other operations. On January 28, 1997, an
action was filed against Pacific Lumber entitled Ecological Rights Foundation,
Mateel Environmental v. Pacific Lumber (the "ERF LAWSUIT"). This action alleges
that Pacific Lumber has discharged pollutants into federal waterways, and seeks
to enjoin these activities, remediation, civil penalties of up to $25,000 per
day for each violation, and other damages. This case was dismissed by the
District Court on August 19, 1999, but the dismissal was reversed by the U.S.
Ninth Circuit Court of Appeals on October 30, 2000, and the case was remanded to
the District Court. On September 26, 2001, the plaintiffs sent Pacific Lumber a
60 day notice alleging that Pacific Lumber continues to violate the CWA
by discharging pollutants into certain waterways. Pacific Lumber
has taken certain remedial actions since its receipt of the notice.

      On December 2, 1997, an action entitled Kristi Wrigley, et al. v. Charles
Hurwitz, John Campbell, Pacific Lumber, MAXXAM Inc., Scotia Pacific Company LLC,
et al. (the "WRIGLEY LAWSUIT") was filed. This action alleges, among other
things, that the defendants' logging practices have contributed to an increase
in flooding and damage to domestic water systems in a portion of the Elk River
watershed. The Company believes that it has strong factual and legal defenses
with respect to the Wrigley lawsuit and ERF lawsuit; however, there can be no
assurance that they will not have a material adverse effect on the Company's
financial position, results of operations or liquidity.

      On March 31, 1999, an action entitled Environmental Protection Information
Center, Sierra Club v. California Department of Forestry and Fire Protection,
California Department of Fish and Game, The Pacific Lumber Company, Scotia
Pacific Company LLC, Salmon Creek Corporation, et al. (the"EPIC-SYP/PERMITS
LAWSUIT") was filed alleging, among other things, various violations of the CESA
and the California Environmental Quality Act, and challenging, among other
things, the validity and legality of the SYP and the Permits issued by
California. August 5, 2002, has been set as the trial date. On March 31, 1999,
an action entitled United Steelworkers of America, AFL-CIO, CLC, and Donald
Kegley v. California Department of Forestry and Fire Protection, The Pacific
Lumber Company, Scotia Pacific Company LLC and Salmon Creek Corporation
(the"USWA LAWSUIT") was filed also challenging the validity and legality of the
SYP. June 10, 2002, has been set as the trial date. The Company believes that
appropriate procedures were followed throughout the public review and approval
process concerning the HCP and the SYP, and the Company is working with the
relevant government agencies to defend these challenges. Although uncertainties
are inherent in the final outcome of the EPIC-SYP/Permits lawsuit and the USWA
lawsuit, the Company believes that the resolution of these matters should not
result in a material adverse effect on its financial condition, results of
operations or the ability to harvest timber.

      On July 24, 2001, an action entitled Environmental Protection Information
Association v. Pacific Lumber, Scotia Pacific Company LLC (the "BEAR CREEK
LAWSUIT") was filed. The lawsuit alleges that Pacific Lumber's harvesting and
other activities under certain of its approved and proposed THPs will result in
discharges of pollutants in violation of the CWA. The plaintiff asserts that the
CWA requires the defendants to obtain a permit from the North Coast Water Board
before beginning timber harvesting and road construction activities in the Bear
Creek watershed, and is seeking to enjoin these activities until such permit has
been obtained. The plaintiff also seeks civil penalties of up to $27,000 per day
for the defendant's alleged continued violation of the CWA. The Company believes
that the requirements under the HCP are adequate to ensure that sediment and
pollutants from its harvesting activities will not reach levels harmful to the
environment. Furthermore, EPA regulations specifically provide that such
activities are not subject to CWA permitting requirements. The Company believes
that it has strong legal defenses in this matter; however, there can be no
assurance that this lawsuit will not have a material adverse effect on its
consolidated financial condition or results of operations.

      While the Company expects environmentally focused objections and lawsuits
to continue, it believes that the HCP, the SYP and the Permits should enhance
its position in connection with these continuing challenges and, over time,
reduce or minimize such challenges.

      OTS Contingency and Related Matters
      On December 26, 1995, the United States Department of Treasury's Office of
Thrift Supervision ("OTS") initiated the OTS action against the Company and
others by filing the Notice. The Notice alleged, among other things, misconduct
by (the "RESPONDENTS") with respect to the failure of United Savings Association
of Texas ("USAT"), a wholly owned subsidiary of United Financial Group ("UFG").
At the time of receivership, the Company owned approximately 13% of the voting
stock of UFG. The Notice claimed, among other things, that the Company was a
savings and loan holding company, that with others it controlled USAT, and that,
as a result of such status, it was obligated to maintain the net worth of USAT.
The Notice made numerous other allegations against the Company and the other
Respondents, including that through USAT it was involved in prohibited
transactions with Drexel Burnham Lambert Inc. The hearing on the merits of this
matter commenced on September 22, 1997 and concluded on March 1, 1999. On
February 10, 1999, the OTS and FDIC settled with all of the Respondents (except
Mr. Charles Hurwitz (Chairman and Chief Executive Officer of the Company), the
Company and Federated) for $1.0 million and limited cease and desist orders.

      Post hearing briefing concluded on January 31, 2000. In its post-hearing
brief, the OTS claimed, among other things, that the remaining Respondents, Mr.
Hurwitz, the Company and Federated, were jointly and severally liable to pay
either $821.3 million in restitution or reimbursement of $362.6 million for
alleged unjust enrichment. The OTS also claimed that each remaining Respondent
should be required to pay $4.6 million in civil money penalties, and that Mr.
Hurwitz should be prohibited from engaging in the banking industry. The
Respondents' brief claimed that none of them has any liability in this matter.
On September 12, 2001, the administrative law judge issued a recommended
decision in favor of the Respondents on each claim made by the OTS. The OTS
Director may accept or change the judge's recommended decision. If changed, such
a decision would then be subject to appeal by any of the Respondents to the
federal appellate court.

      On August 2, 1995, the Federal Deposit Insurance Corporation ("FDIC")
filed the Federal Deposit Insurance Corporation, as manager of the FSLIC
Resolution Fund v. Charles E. Hurwitz (the "FDIC ACTION"). The original
complaint was against Mr. Hurwitz and alleged damages in excess of $250.0
million based on the allegation that Mr. Hurwitz was a controlling shareholder,
de facto senior officer and director of USAT, and was involved in certain
decisions which contributed to the insolvency of USAT. The original complaint
further alleged, among other things, that Mr. Hurwitz was obligated to ensure
that UFG, Federated and the Company maintained the net worth of USAT. In January
1997, the FDIC filed an amended complaint which seeks, conditioned upon the OTS
prevailing in its administrative proceeding, unspecified damages from Mr.
Hurwitz relating to amounts the OTS does not collect from the Company and
Federated with respect to their alleged obligations to maintain USAT's net
worth. The FDIC may not pursue its claims under the FDIC action if the OTS
Director accepts the judge's recommended decision.

      On May 31, 2000, the Company, Federated and Mr. Hurwitz filed a
counterclaim to the FDIC action (the "FDIC COUNTERCLAIM"). The FDIC Counterclaim
states that the FDIC illegally paid the OTS to bring claims against the Company,
Federated and Mr. Hurwitz. The Company, Federated and Mr. Hurwitz are asking
that the FDIC be ordered to not make any further payments to the OTS to fund the
administrative proceedings described above, and seek reimbursement of attorneys'
fees and damages from the FDIC. As of December 31, 2001, such fees were in
excess of $35.0 million. The Company, Federated and Mr. Hurwitz intend to pursue
this claim vigorously.

      On January 16, 2001, an action was filed against the Company, Federated
and certain of the Company's directors entitled Alan Russell Kahn v. Federated
Development Co., MAXXAM Inc., et. al., (the "KAHN LAWSUIT") was filed. The
plaintiff purports to bring this action as a stockholder of the Company
derivatively on behalf of the Company. The lawsuit concerns the FDIC and OTS
actions, and the Company's advancement of fees and expenses on behalf of
Federated and certain of the Company's directors in connection with these
actions. It alleges that the defendants have breached their fiduciary duties to
the Company, and have wasted corporate assets, by allowing the Company to bear
all of the costs and expenses of Federated and certain of the Company's
directors related to the FDIC and OTS actions. The plaintiff seeks to require
Federated and certain of the Company's directors to reimburse the Company for
all costs and expenses incurred by the Company in connection with the FDIC and
OTS actions, and to enjoin the Company from advancing to Federated or certain of
the Company's directors any further funds for costs or expenses associated with
these actions. The parties to the Kahn lawsuit have agreed to an indefinite
extension of the defendants' obligations to respond to the plaintiffs' claims.

      The Company's bylaws provide for indemnification of its officers and
directors to the fullest extent permitted by Delaware law. The Company is
obligated to advance defense costs to its officers and directors, subject to the
individual's obligation to repay such amount if it is ultimately determined that
the individual was not entitled to indemnification. In addition, the Company's
indemnity obligation can, under certain circumstances, include amounts other
than defense costs, including judgments and settlements.

      Although the OTS Director may change the judge's recommended decision, the
Company believes that the ultimate resolution of the OTS and FDIC matters should
not have a material adverse effect on its consolidated financial position,
results of operations or liquidity. Furthermore, with respect to the Kahn
lawsuit, the Company believes that the resolution of this matter should not
result in a material adverse effect on its consolidated financial position,
results of operations or liquidity.

      Other Matters
      The Company is involved in various other claims, lawsuits and other
proceedings relating to a wide variety of matters. While uncertainties are
inherent in the final outcome of such matters and it is presently impossible to
determine the actual costs that ultimately may be incurred, management believes
that the resolution of such uncertainties and the incurrence of such costs
should not have a material adverse effect on the Company's consolidated
financial position, results of operations or liquidity.

17.   DERIVATIVE FINANCIAL INSTRUMENTS AND RELATED HEDGING PROGRAMS

      In conducting its business, Kaiser uses various instruments to manage the
risks arising from fluctuations in aluminum prices, energy prices and exchange
rates. Kaiser enters into hedging transactions to limit its exposure resulting
from (i) its anticipated sales of alumina, primary aluminum, and fabricated
aluminum products, net of expected purchase costs for items that fluctuate with
aluminum prices, (ii) the energy price risk from fluctuating prices for natural
gas, fuel oil and diesel oil used in its production process, and (iii) foreign
currency requirements with respect to its cash commitments to foreign
subsidiaries and affiliates.

      As Kaiser's hedging activities are generally designed to lock-in a
specified price or range of prices, realized gains or losses on the derivative
contracts utilized in these hedging activities (except the impact of those
contracts discussed below which have been marked to market) will generally
offset at least a portion of any losses or gains, respectively, on the
transactions being hedged. See Note 1 for a discussion of the effects of the new
accounting requirements under SFAS No. 133, which is being used for reporting
results beginning with the first quarter of 2001.

      Because the agreements underlying Kaiser's hedging positions provided that
the counterparties to the hedging contracts could liquidate Kaiser's hedging
positions if Kaiser filed for reorganization, Kaiser chose to liquidate these
positions in advance of the Filing Date. Proceeds from the liquidation totaled
approximately $42.2 million. Gains or losses associated with these liquidated
positions have been deferred and are being recognized over the original hedging
periods as the underlying purchases/sales are still expected to occur. The
amount of gains/losses deferred are as follows: gains of $30.2 million for
aluminum contracts, losses of $5.0 million for Australian dollars and $1.9
million for energy contracts. The following table summarizes Kaiser's derivative
hedging positions at December 31, 2001:


                                                                       CARRYING/
                                                                        MARKET
                    COMMODITY                           PERIOD           VALUE
-------------------------------------------------   ---------------  -------------

Aluminum -
   Option contracts and swaps....................        2002        $       40.8
   Option contracts..............................        2003                11.9
Australian dollars - option contracts............    2002 to 2005             4.0
Energy -
   Natural gas - option contracts and swaps......    1/02 to 3/02            (1.2)
   Fuel oil - swaps..............................    1/02 to 3/02             0.7

      During the first quarter of 2001, Kaiser recorded a mark-to-market benefit
of $6.8 million (included in investment, interest and other income (expense))
related to the application of SFAS No. 133. However, starting in the second
quarter of 2001, the income statement impact of mark-to-market changes was
essentially eliminated as unrealized gains or losses resulting from changes in
the value of these hedges began being recorded in other comprehensive income
(see Note 1) based on changes in SFAS No. 133 enacted in April 2001.

      During late 1999 and early 2000, Kaiser entered into certain aluminum
contracts with a counterparty. While Kaiser believed that the transactions were
consistent with its stated hedging objectives, these positions did not qualify
for treatment as a "hedge" under accounting guidelines. Accordingly, the
positions were marked-to-market each period. A recap of mark-to-market pre-tax
gains (losses) for these positions, together with the amount discussed in the
paragraph above, is provided in Note 2. During the fourth quarter of 2001,
Kaiser liquidated all of the remaining positions. This resulted in the
recognition of approximately $3.3 million of additional mark-to-market income
during 2001.

      As of December 31, 2001, Kaiser had sold forward substantially all of the
alumina available to it in excess of its projected internal smelting
requirements for 2002 and 2003, respectively, at prices indexed to future prices
of primary aluminum.

      Kaiser anticipates that, subject to the approval of the Court and
prevailing economic conditions, it may reinstitute an active hedging program to
protect the interests of its constituents. However, no assurance can be given as
to when or if the appropriate Court approval will be obtained or when or if such
hedging activities will restart.

18.   SUBSEQUENT EVENT

      Subsequent to December 31, 2001, Kaiser paid an aggregate of $10.0 million
into two separate trusts funds in respect of (i) potential liability obligations
of directors and officers and (ii) certain obligations relating to management
compensation agreements. These payments will result in an approximate $5.0
million increase in other assets and an approximate $5.0 million charge to
selling, administrative, research and development, and general expenses in 2002.

19.   SUPPLEMENTAL CASH FLOW AND OTHER INFORMATION

                                                                                     YEARS ENDED DECEMBER 31,
                                                                                -----------------------------------
                                                                                   2001        2000        1999
                                                                                ----------  ----------  -----------
                                                                                           (In millions)
                                                                                            -----------
Supplemental information on non-cash investing and financing activities:
   Repurchases of debt using restricted cash and marketable securities........  $       -   $    52.4   $        -
   Purchases of marketable securities and other investments using restricted
      cash                                                                              -         0.4         15.9

Supplemental disclosure of cash flow information:
   Interest paid, net of capitalized interest.................................  $   186.9   $   183.5   $    189.9
   Income taxes paid, net.....................................................       52.2        19.6         27.0

20.   QUARTERLY FINANCIAL INFORMATION (UNAUDITED)

      Summary quarterly financial information for the years ended December 31,
2001 and 2000 is as follows (in millions, except share information):


                                                                           THREE MONTHS ENDED
                                                     --------------------------------------------------------------
                                                        MARCH 31         JUNE 30      SEPTEMBER 30     DECEMBER 31
                                                     --------------  --------------  --------------  --------------
2001:
   Net sales.......................................  $       544.4   $       516.2   $       504.1   $       453.5
   Operating income (loss).........................          209.3           (30.2)          (34.3)          (99.4)
   Income (loss) before extraordinary items........           63.4           (44.4)           29.4          (508.0)
   Extraordinary items, net........................            1.9             1.7               -               -
   Net income (loss)...............................           65.3           (42.7)           29.4          (508.0)
   Basic earnings (loss) per common share:
      Income (loss) before extraordinary items.....  $        8.56   $       (6.80)  $        4.09   $      (77.83)
      Extraordinary items, net.....................           0.25            0.27               -               -
                                                     --------------  --------------  --------------  --------------
      Net income (loss)............................  $        8.81   $       (6.53)  $        4.09   $      (77.83)
                                                     ==============  ==============  ==============  ==============
   Diluted earnings (loss) per common and common
      equivalent share:
      Income (loss) before extraordinary items.....  $        8.56   $       (6.80)  $        4.08   $      (77.83)
      Extraordinary items, net.....................           0.25            0.27               -               -
                                                     --------------  --------------  --------------  --------------
      Net income (loss)............................  $        8.81   $       (6.53)  $        4.08   $      (77.83)
                                                     ==============  ==============  ==============  ==============
2000:
   Net sales.......................................  $       637.6   $       627.1   $       618.3   $       565.0
   Operating income................................           38.5            60.6             1.4            30.1
   Income (loss) before extraordinary items........            3.5            10.3           (17.3)           33.5
   Extraordinary items, net........................            1.4               -             0.6             1.9
   Net income (loss)...............................            4.9            10.3           (16.7)           35.4
   Basic earnings (loss) per common share:
      Income (loss) before extraordinary items.....  $        0.44   $        1.36   $       (2.54)  $        4.51
      Extraordinary items, net.....................           0.18               -            0.07            0.27
                                                     --------------  --------------  --------------  --------------
      Net income (loss)............................  $        0.62   $        1.36   $       (2.47)  $        4.78
                                                     ==============  ==============  ==============  ==============
   Diluted earnings (loss) per common and common
      equivalent share:
      Income (loss) before extraordinary items.....  $        0.44   $        1.36   $       (2.54)  $        4.51
      Extraordinary items, net.....................           0.18               -            0.07            0.27
                                                     --------------  --------------  --------------  --------------
      Net income (loss)............................  $        0.62   $        1.36   $       (2.47)  $        4.78
                                                     ==============  ==============  ==============  ==============

---------------------

(1)   Basic earnings per share for 2000 have been restated to reflect the
      dilutive effect of participating convertible preferred securities. See
      Note 1 to the Consolidated Financial Statements.`